Is a Mortgage Loan Modification Right For You? 

Key Takeaways:

• Homeowners having trouble making mortgage payments have options, but some carry more serious consequences than others. 
• Loan modifications may be the best option, but your lender is under no obligation to agree to give you one. 

If you’re a homeowner struggling to make your mortgage payments, there are different options to deal with the issue. A loan modification – making a change to your existing mortgage – is one way, but not the only one. Here, we’ll discuss when it might make the most sense to pursue a modification and how to apply for one. 

To start, if you can’t pay your mortgage, you shouldn’t panic. But you should take immediate action. Begin by calling the company that services your mortgage, ask what your options are, and work with them to develop a plan.  

Separately, you may also seek help from a HUD-approved housing counseling agency. These government-trained counselors can help you understand and assess your options.  

Options when you can’t pay your mortgage 

Loan modifications are for homeowners who are facing serious, long-term financial hardship. Before we explore these in more detail, let’s look at other options that may work if you are struggling to make your mortgage payment. 

Refinancing your loan: This option may not be appropriate right now, with interest rates as high as they are. Still, if you have lots of home equity, refinancing and accessing some of that equity as cash might be welcome. 

Getting forbearance on your loan: Your servicer may have options for forbearance or hardship situations, which can include pausing your monthly payments, making smaller ones for a period of time, or both. Forbearance can be helpful if you have a one-time event, like a disaster, from which to recover, but just keep in mind that it requires you to make up all missed payments. 

Doing a short sale: Selling a home for less than the amount owed on a mortgage is referred to as a “short sale,” and it’s a serious step. If you decide to consider this, talk to your lender. Learn whether you would be responsible for the full amount owed on the mortgage, or just the amount for which the home sells. Either way, you won’t walk away with any equity, and your credit score will take a hit. 

Ask about a “deed-in-lieu”: This awkward phrase means turning over your house’s deed in lieu of (instead of) going through a foreclosure. It’s sometimes referred to as “mailing back the keys.” It’s also an extremely serious option: you’ll lose all the money you’ve paid toward your home so far and you will have a black mark on your credit score. 

Consider a home equity agreement: A Home Equity Agreement (HEA) from Unlock is another option. HEAs allow you to take cash out of the equity you’ve built in your home. You can use that money for whatever you need and continue to live in your home as before. You won’t have to go through another loan application process like you would with home equity products from a bank or through a refinance. And because it’s not a loan, you won’t have another monthly payment.  

As we’ve said before, it’s critical to reach out to your mortgage servicer as soon as you realize you’re having trouble making your mortgage payments. Some companies may require that you have missed a mortgage payment before you get help, and some will work with you if you say you are about to miss a payment for the first time. However, in most cases, you cannot be more than one month behind. Unlock’s HEA, for example, is only available to homeowners who don’t have any 90-day delinquencies in the past 24 months.  

Loan modification 

As explained, loan modifications are for homeowners who are facing serious, long-term financial hardship. A loan modification is not an automatic right, but something a lender may consider if they want to make it possible for you to continue paying your mortgage despite your change in circumstances. With that in mind, here’s how to approach it.  

Tell your lender exactly what’s going on with your finances. Ask what hardship alternatives they have available. They can offer a few ways to make your mortgage more affordable via modifications. You may be able to negotiate a slightly lower interest rate, extend the repayment period of your mortgage, or reduce the principal balance owed. In some cases, the lender may be able to match your monthly payment to your income. 

You’ll want to know all your options, no matter what route you wind up taking. Also, tell your lender honestly when you think you’ll be able to resume making full payments again. 

Preparing for a loan modification 

Gather all your relevant financial documents, including proof of hardship and recent bank statements. Your lender will probably want you to write a letter documenting your hardship, why you’re having trouble making payments, and how you expect to get back on your feet again. They will probably also have their own formal process for you to apply for a modification. Make sure you understand all the pieces and complete them by the time they’re due. 

It’s also important to keep in mind that a modification may impact your credit score. It’s up to the lender to decide whether to report the modification as a debt settlement, which would negatively impact your score. Make sure you know what their plans are before you agree to anything. 

Keep in mind that your lender is under no obligation to grant you a modification. The best way to get them to agree is to demonstrate real financial hardship as well as a commitment to making good on your payments over the long term. You want your lender to believe that it’s in their best interest to help you by granting you this big request.  

If you do apply for a modification and are denied, you have the right to appeal. You can consult the information compiled by the Consumer Financial Protection Bureau on that subject.  

Conclusion 

If you decide that a loan modification is right for you, good luck. Ideally, it will help you get back on your feet and continue making mortgage payments for the long term. Remember that there are other options and do your homework!