What Is Mortgage Loan Modification?

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A mortgage loan modification can offer an opportunity for borrowers to get their monthly payment on their mortgage reduced to an amount they can afford. A mortgage loan modification may extend the years you have to repay the loan, reduce your interest rate, reduce your principal balance or change the overall structure of the loan.  

A loan modification is a long-term financial relief option if you can’t repay your current mortgage on the original schedule. You’ll need to be approved by your lender to qualify, but if qualified, it could help you avoid foreclosure. Read on to understand how mortgage loan modification works. 

Understanding Mortgage Loan Modifications

Mortgage loan modification is a process in which the terms of a mortgage loan are modified or changed to make it more affordable for the borrower. This usually involves reducing the interest rate, extending the loan term or forgiving a portion of the principal balance. This can relieve the pressure or obligations on the borrower and help them avoid foreclosure. 

Loan Modification vs. Refinance

Loan modification and refinance are two different processes. A loan modification changes the original terms of your mortgage loan but doesn’t pay off your current mortgage or replace it. A refinance means you get a new mortgage and pay off your current mortgage in full. This allows you to potentially secure a lower interest rate or better terms. 

Another key difference between loan modification and a mortgage refinance is the impact on your credit score. A mortgage modification may negatively impact your credit score, while a refinance typically will not have a significant credit score impact. 

Finally, you can only get a loan modification through your current lender, so you won’t be able to compare offers. With a mortgage refinance, you can compare offers from many lenders to secure the best possible terms. 

How to Qualify for a Home Loan Modification

You must meet specific lender or program requirements to qualify for a home loan modification. Qualification requirements vary by lender or mortgage loan modification program. Generally, borrowers must demonstrate financial hardship, provide proof of income and show that they cannot afford the current mortgage payments. 

You also may need to provide proof of debt, liabilities or other reasons you cannot meet the requirements for the mortgage payments. Commonly, you must meet three criteria to qualify for a home loan modification:

• You are at least one month behind on your loan or about to miss a payment
• Have a significant financial hardship 
• Live in the home as your primary residence

Examples of significant financial hardship include:

• Divorce
• Natural disaster
• Long-term illness or disability
• Death of an income-providing family member
• Sudden hikes in housing costs like property tax

How to Apply for Mortgage Loan Modification

Every loan provider has its own standards and requirements for mortgage modification. Here is the step-by-step process of applying for mortgage loan modification.

1. Inquire with your lender about mortgage modification requirements. These typically include proof of financial hardship and that the home is your primary residence.
2. Provide required documents, including proof of income, most recent tax return, bank statements and a hardship statement. This may also include medical bills, a termination letter or other supporting documentation. 
3. Contact the lender to apply for a mortgage modification. 
4. If the lender refuses the mortgage modification, you can also inquire about a mortgage refinance. 

How Long Does a Loan Modification Process Take?

The length of the mortgage loan modification process can vary depending on the lender and individual circumstances. In some cases, it could take three to six months, but this depends on the lender’s process and whether it offers streamlined loan modification.

Alternative Options for Home Loan Modifications

Remember that you have options. If you do not qualify for a mortgage loan modification, there may be alternatives to consider. First, there is always the option to refinance the loan. With a refinance, you can get longer terms, lower interest rates or better terms. 

In addition, you could apply for a forbearance or repayment plan or explore government programs such as the Home Affordable Refinance Program (HARP) or the Home Affordable Modification Program (HAMP). Government assistance programs can offer you short-term relief or affordable refinance options. Learn more about HAMP here. 

Should You Apply for a Mortgage Loan Modification?

Applying for a mortgage loan modification is a last resort when you’re facing financial difficulties. When necessary, it can offer relief to carry through the challenging time and allow you to reduce the risk of foreclosure and protect your home. Depending on your situation, you can also consider a loan refinance or government assistance programs. If you want to refinance, find the best online mortgage lenders or best lenders for poor credit here. 

Frequently Asked Questions 

The post What Is Mortgage Loan Modification? by Alison Plaut appeared first on Benzinga. Visit Benzinga to get more great content like this.