Struggling to Pay Your Mortgage? A Loan Modification Could Be the Solution
Financial difficulties can strike at any time, making it challenging for homeowners to keep up with their loan payments. Whether it’s job loss, illness, or divorce, if you’re having trouble paying your mortgage, a loan modification could be your best option.
What is a Loan Modification?
A loan modification refers to permanently changing the terms of your existing mortgage loan rather than replacing it with a new one. This can help you avoid foreclosure on your home and get back on more solid financial footing.
How Does Loan Modification Work?
If your mortgage payments are higher than you can afford, you can apply with your lender for a mortgage modification that will lower your payments to an amount you can handle. In some cases, a loan modification will require a trial period of several months before it becomes permanent. Your lender will review your situation to determine what type of loan modification terms are most likely to help you manage your mortgage payments.
Options for Loan Modification
Some options for loan modification include:
- Lowering the mortgage principal and interest rate portions of your monthly payments
- Extending the repayment term to reduce your monthly payment, sometimes to a 40-year loan
- Adding past-due amounts to the principal balance and recalculating your monthly payment to bring your loan current
- Forgiving some of the balance to lower your monthly payment
- Changing the loan term from an interest-only payment or adjustable-rate mortgage to a fixed-rate mortgage to stabilize your payments
Qualifying for a Loan Modification
To qualify for a loan modification, you’ll need to demonstrate a reason for your hardship, such as loss of income or unexpected expenses due to a death in the household, a natural disaster, a job loss, a divorce, or some other circumstance that impacts your ability to make your existing mortgage payments. You’ll also need to show that you can afford to make modified mortgage payments.
Applying for a Loan Modification
If you’re struggling to pay your mortgage, the first step is to call your lender. Depending on your circumstances, your lender should discuss several options with you, including possibly a loan modification. You can also contact a HUD-approved housing counselor in your area who can help you understand your options, given your personal financial situation.
Loan Modification Programs
Loan modification options vary by loan program and lender, but generally, you can expect to find programs such as:
- The Flex Modification program, available for primary residences and second or investment homes with loans owned or partially owned by Fannie Mae or Freddie Mac
- FHA loan modification programs, including the COVID-19 recovery program
- VA loan modification programs, which can include extending the loan term, reducing the interest rate, or including past-due loan amounts in their loan with a new repayment schedule
- USDA loan modification programs, which can include extending the loan term or lowering the interest rate
Pros and Cons of Loan Modification
While a loan modification can be a way to save your house from foreclosure, this solution to financial difficulties has some advantages and disadvantages. On the plus side, you can continue to own your home, lower your payments, and potentially refinance in the future to more favorable terms. On the downside, your credit score could decrease, and you may pay more interest over time if the loan term is extended.
Alternatives to Loan Modification
If a loan modification isn’t the right solution for you, there are other options available, including:
- Forbearance, which allows you to pause or lower your monthly payments for a specific time
- Refinancing, which can help you qualify for a new loan with lower payments
- Short sale, which involves selling your home for less than the amount owed on the mortgage
- Deed-in-lieu of foreclosure, which allows you to give up your home and avoid the foreclosure process
Frequently Asked Questions
- Can I qualify for a loan modification if I’ve already missed payments?
- How does a loan modification affect my credit score?
- Do I need to hire a lawyer for a mortgage loan modification?
- What are the pros and cons of loan modification compared to other options?
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