If you've ever struggled to make your monthly mortgage payments, you understand how stressful it is living under the threat of losing your home. A mortgage modification can makes your home loan more affordable by reducing the size of your monthly mortgage payments. This provides a longer-term solution than a mortgage forbearance, which temporarily postpones your payments.
How Does a Mortgage Modification Work?
A mortgage modification adjusts your monthly mortgage payment to a more manageable level. These can be done in one (or more) of the following ways:
- Reducing your interest rate
- Extending your loan term
- Re-amortizing your mortgage
- Modify your mortgage type
You should keep in mind that a loan modification doesn't always reduce the total amount paid on your mortgage, instead it shifts your payments around (as well as any late fees/penalties) in a way that lowers your monthly payments. Generally, you can look at your mortgage as an equation made up of your interest rate, loan term and monthly payment. You can adjust one factor to the figure you want by modifying your interest rate or extending your loan term. Mortgage modifications often work in this way, and can sometimes result in an even more expensive mortgage over the long run.
Re-amortization is simply a fancy word for restructuring your remaining mortgage payments. Ideally, if you already paid off some of the principal amount on your initial loan; re-amortization shuffles the remaining balance to allow for smaller monthly payments. Additionally, mortgage modification can sometimes involve switching your mortgage from an adjustable rate into a fixed rate if you have an outstanding adjustable rate mortgage.
Regardless of how the lender modifies your mortgage, it will likely come at a cost to you. A mortgage modification should be viewed as one of your last options to avoid foreclosure or a short sale. Mortgage modifications may also impact your credit score based on how they're reported to the credit bureaus. Lenders may also tack on additional charges for processing a mortgage modification, and add them to your remaining balance on the loan.
Finally, mortgage modifications are completed at a lender's behest. If the lender doesn't believe you can manage your loan payments even after a modification, they may push you toward selling your home, or even accepting a short sale. It's also unlikely for lenders to grant follow-up mortgage modifications to borrower's in dire straits. Nevertheless, borrowers will find that mortgage lenders are often willing to work with them to find a solution, so it's still better to contact your lender to figure out your options rather than wallow in an ever-increasing tide of debt.
Why Should I Get a Mortgage Modification?
One of the obvious advantages to a mortgage modification is that it helps you avoid a foreclosure or short sale on your property. From a lender's perspective, it's often cheaper to cooperate with a struggling borrower than force the sale of a home, sometimes at a loss. While modifying a mortgage may reduce a lender's long-term profits, it's often less expensive than initiating foreclosure proceedings.
The reduced monthly payments from a mortgage modification are also instrumental to many borrowers trying to get back on track with their loans. Falling short on your monthly payments can often dip your credit score by as much as 100 points. While modifying your mortgage isn't ideal, it can help you catch up on a past-due balance.
How Do I Request a Mortgage Modification?
Borrowers can't just initiate a mortgage modification on their own, they must first request it through their lender, who then must decide whether the borrower is eligible. The test for mortgage modification requires borrowers to prove unavoidable financial hardship, which may include a death of the family breadwinner, extended unemployment, debilitating illness or permanent disability. Hardships incurred as a result of credit card debt or auto loans typically won't pass this test. This is because such expenses are deemed to be within your control; lenders are more likely to grant mortgage modifications for unavoidable life events.
The borrower must also show that they're willing and able to meet their new obligations under the agreement. The lender will take your available monthly income into account, and use that to adjust your monthly payments. This will require you to submit pay stubs or tax returns for verification. If you have other monthly expenses like student or auto loans, you will also be required to furnish those statements to your lender for consideration.
Once you've provided the necessary documents, you will need to complete a formal application for the modification and explain your situation in a letter. Your application should include your debt-to-income ratio, list of your outstanding expenses and the reason why you're requesting a mortgage modification.
If you are approved for a modification, make sure you're comfortable with the new terms surrounding your mortgage before you accept them. It's important to fully understand how your total expenses will change, even though many borrowers won't have many alternatives at this point. If you need more information, Fannie Mae also provides a help network that can assist you in understanding the terms of mortgage modifications, and understanding whether you're likely to qualify for one.