What a 'Mortgage Loan Modification' Is, and When You Should Get One

If you're struggling to make your monthly mortgage payments due to financial hardship, a loan modification could provide much-needed relief. A mortgage loan modification is a permanent change to your loan terms that is agreed to by your lender in order to make the payments more affordable and help you avoid foreclosure.

What does mortgage loan modification look like?

Common ways a loan can be modified include:

• Reducing the interest rate, even if only temporarily

• Extending the loan term to spread costs over more years

• Adding missed payments to the loan balance

• Switching to a different loan program or type

The end goal of a modification is to get you into a more affordable payment based on your current financial situation. Lenders are often willing to modify loans for borrowers facing legitimate hardships, rather than go through an expensive foreclosure process.

What qualifies as a hardship?

To be eligible for a mortgage modification, you'll need to prove you are facing a real financial hardship that is impacting your ability to pay. Hardships that may qualify include:

• Job loss or income reduction

• Unmanageable increase in housing expenses

• Excessive debt or monthly obligations

• Divorce or death of a spouse

• Serious illness or disability

Your lender will require documentation of your hardship circumstances as well as detailed information on your income, assets, expenses, and other debts. Having missed mortgage payments already often strengthens the case for modification.

How to apply for a loan modification

The first step is to contact your mortgage servicer (the company you make monthly payments to), and specifically inquire about their loan modification programs. Many participating in government-sponsored programs, which have specific eligibility criteria.

You'll need to fill out a modification application package with detailed documentation on your hardship, income, assets, and any other requested information. Be prepared to provide evidence with documents like tax returns, pay stubs, bank statements, bills, and more.

Your servicer will run the numbers to determine the most affordable modified payment plan they are willing to offer based on your specific situation and loan characteristics. You may be required to do credit counseling or go through a trial payment period successfully before the modification is made permanent.

If approved, the new modified terms will be documented and made permanent. While your credit will take a hit, a loan modification is better than foreclosure or bankruptcy for your credit score in the long run.

Even if you're not yet behind on payments but see financial challenges ahead, it's better to work with your servicer proactively on a solution rather than get behind. Being transparent about your hardship and exploring modification options early can help you avoid further setbacks and keep you in your home long-term.

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