If you start to fall behind on your mortgage payments, it could eventually lead to foreclosure. Depending on your financial circumstances, your lender may offer a mortgage modification plan. These plans could help you stay in your home by lowering your monthly payments. If you've been struggling to make your payments, or already missed a payment, a mortgage modification may help.
A mortgage modification changes the terms of your original mortgage agreement. Your lender will work with you to try and find a way to lower your monthly payment by adjusting the terms of your current mortgage. The goal is to help you get back on track.
Lenders have several options when it comes to a mortgage loan modification. They'll work with you to find the best solution for your situation. You may want to talk to your lender about a mortgage modification if you:
A mortgage modification alters your original loan. Before deciding on one, you should know how it could affect your loan.
While modifications and most refinancing agreements share a goal of lowering your monthly payments, the two programs are very different. Refinancing is the process of securing a new mortgage. You’ll need to apply, qualify and close on a new mortgage loan, and you may choose to refinance with a new lender. Alternatively, a mortgage modification adjusts the mortgage agreement that's already in place with your current lender.
If you’re experiencing financial difficulties, refinancing may not be an option since you may not qualify for a new loan with the changes in your financial circumstances. A modification doesn’t require the same kind of application and approval as a refinance. That means it could be a better option if you have less-than-perfect credit or your income has decreased.
Be prepared for your credit score to go down when you apply for a mortgage modification. If you've already missed some payments, your credit score will also be negatively affected. Keep in mind, though, that the impact on your credit score from a mortgage loan modification will be less severe than the impact of a foreclosure. Foreclosures stay on your credit history for seven years. They can also automatically disqualify you from some future loan programs. This won't be the case with a mortgage modification.
The good news with a mortgage modification is that you'll be in a good position to rebuild your credit score. With a lower payment, you’ll have an opportunity to catch up on any missed mortgage payments. You may even have enough breathing room in your budget to catch up on other bills as well.
Mortgage modifications aren't the only option you have to prevent foreclosure. If your financial circumstances are temporary, then your lender may be able to offer you a mortgage forbearance. This is a temporary pause or reduction in payment amount instead of modifying the loan permanently. These programs are specifically for those who have only a temporary change in their circumstances but will be able to resume their regular repayments after a short period of time.
If you can restart your normal mortgage payments again after missing one or two, then you may be better off setting up a repayment plan with your lender. Instead of modifying your loan, your lender can increase your payment amount temporarily until you've made up the payments you missed. After that, your payments would go back to their regular amount.
Contacting your lender as soon as you know you aren't going to make a payment is best. This helps them find the right option for your circumstances.
If you need a mortgage modification now, you may still be able to refinance later on. Refinancing can help you reduce the length of your loan, or help you secure a lower interest rate. However, refinancing depends on your income history and credit score. It's good to keep in mind that if your financial situation improves in the future, you aren't locked into the modified mortgage.
If you need a mortgage loan modification, you may end up paying more for your home over the life of your loan. For example, say your modification involves changing your loan from a 30-year mortgage to a 40-year mortgage. You'll end up paying an additional ten years’ worth of interest on the principal amount.
If you plan on selling, this might not matter as much. But if you’re hoping to pay off the house, this can have a big impact on your future financial plans.
A mortgage modification isn't automatic. You'll need to contact your lender and see if you’re eligible for their modification program. Then you'll need to apply and get approved for the modification. Your lender will review your income and expenses and talk with you to better understand why you need a modification.
You may need to have a qualifying life event to get the mortgage loan modification, which could include:
Talking to your lender will help you determine if you’re eligible for an adjustment and what you'll need to do to apply.
A mortgage modification can help you and your family keep your home. The most important step is talking to your lender as soon as you know you may have difficulty making your mortgage payment. Being proactive can help prevent bigger issues like foreclosure.
