Avoiding Foreclosure: Mortgage Loan Modifications

By Linda Doell. May 7th 2016

When an unexpected crisis hits, a homeowner's monthly income could drop, making it difficult to pay bills, especially the mortgage payment.

This situation is all too familiar to homeowners like Mark from Ohio. After losing his job during a manufacturing slowdown in April 2009, Mark applied for a loan modification through the federal Home Affordable Modification Program. He was approved for a loan modification which dropped his mortgage payment from $984 to $644 a month.

Many homeowners struggling to make their mortgage payment are looking into mortgage modifications as a way to avoid foreclosure. But what is a mortgage modification and how can it help you stay in your house?

What Is A Mortgage Loan Modification?

A mortgage loan modification is any permanent change made to a mortgage contract. It differs from a mortgage refinancing because, unlike a mortgage refinancing, it does not involve the creation of a new mortgage contract. Instead, a mortgage modification modifies the current mortgage contract. You and your mortgage lender must agree on the modification before it can take effect.  

The purpose of a mortgage modification is to make the monthly mortgage payment smaller and therefore more manageable for the homeowner. The Federal Trade Commission lists the following common types of mortgage modifications:

  • Lowering the interest rate on the loan
  • Changing the type of interest rate (from fixed to variable or variable to fixed)
  • Extending the duration of the loan (for example changing the loan duration from 15 to 20 years)
  • Adding missed payments to the balance of the loan
  • Reducing the amount owed on the loan through debt forgiveness and cancellation

How Much Does A Mortgage Modification Cost?

There are two ways to get a loan modification.

The first is to pay a company to negotiate a loan modification with your mortgage lender. If you choose this option, be wary of companies that charge an upfront fee to go after the loan modification. This is illegal according to the Federal Trade Commission. Instead, make sure that you do not pay any fees until you have a written loan modification offer from your lender.

The second option is to directly negotiate with your mortgage lender. You generally don’t have to pay any fees for this. Keep in mind that you may be able enlist the free help of a nonprofit agency approved by the Department of Housing and Urban Development to help with the negotiation.

Government Assistance

It is important to know that there are federal programs run by the U.S. Department of Treasury and Housing and Urban Development that are available to assist homeowners in attaining a loan modification.

According to the New York Times, a homeowner can qualify for government assistance for a loan modification if:

  • The home is the homeowner’s primary residence
  • The monthly mortgage payment is more than 31 percent of the homeowner's monthly income before any payroll deductions.
  • The homeowner also must show financial hardship and an inability to pay the current monthly mortgage payment.
  • The total loan amount does not exceed the limits set by the government.  

There is also a separate government program that helps unemployed homeowners by reducing their mortgage payments or suspending them completely for a year or more depending on the situation of the homeowner. Dubbed the Home Affordable Unemployment Program, the program can reduce mortgage payments by up to 31 percent of the homeowner's income or suspended it for a period of time.

Other Alternatives To A Mortgage Modification

For homeowners struggling to pay their loan, there are other avenues to reduce monthly payments, improve their interest rate or avoid foreclosure. With the exception of personal bankruptcy, these alternatives to mortgage modification are useful to homeowners who find themselves in a temporary financial bind expected to last a short period such as several months.

The FTC gives the following examples of available alternatives:

Reinstatement: The homeowner pays the loan servicer the entire past-due amount, plus late fees by a date both agree to. This is a good option if the problem with paying the mortgage is temporary and not a long-term issue.

Repayment Plan: The lender gives the homeowner a time frame to pay the past-due amount.

Forbearance: The mortgage payments are reduced or suspended for a set period of time agreed upon by both the homeowner and the lender. This could be a good alternative in cases where the homeowner's income is temporarily reduced, such as during a work furlough, but is expected to rise again in the near future.

Personal Bankruptcy: The FTC calls this the debt management option of last resort and for good reason. A bankruptcy will stay on a person's credit report for 10 years and can negatively impact that person's ability to get credit in the future.

If you are at risk of losing your home, you might want to consider obtaining a loan modification. It can save you from losing your home and ruining your credit and it can be a simpler solution than a mortgage refinancing. Keep in mind that it is always a good idea to talk with a financial adviser or credit councilor before doing a loan modification.

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