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Mortgage loan modification: What it is and how to get one

Key takeaways

A loan modification is a long-term mortgage relief option for borrowers experiencing financial hardship, such as loss of income due to illness.
A modification typically changes the loan’s rate, term or both to make monthly payments more affordable.
If you’re seeking to modify your mortgage, you must provide proof of hardship to your mortgage lender or servicer.

What is a loan modification?

A mortgage loan modification is a relief option designed for borrowers experiencing long-term financial hardship that permanently changes an existing mortgage. If approved by your lender, this option can lower your interest rate, change the structure of your overall loan or both. The goal of a mortgage modification is to reduce your monthly payments to an affordable level, helping you stay up to date on the loan and in your home.

Lenders allow loan modification agreements because the alternative — default and foreclosure — are more costly to their business. In other words, they don’t want the house, but they do want the loan repaid. A modification helps accomplish both goals.

How to qualify for a mortgage modification

To qualify for a loan modification, you’ll typically need to meet these three requirements, at a minimum:

Provide proof of significant financial hardship, such as long-term illness or disability, the death of an income-providing family member, a sudden hike in housing costs like property taxes, divorce or natural disaster
Be at least one month behind on your loan or about to miss a payment
Live in the home as your primary residence

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Types of mortgage modifications

There are several avenues to make your mortgage more affordable, and your options could differ based on the type of loan you have (more on that below). In general, your lender or servicer might implement one or more of these modification options:

Cut the interest rate: With a lower rate, you’ll have lower monthly mortgage payments and save on interest in the long run.
Extend the repayment period: Lengthening the loan term lowers your monthly mortgage payments.
Reduce the principal: In some cases, the lender might forgive some of the loan balance to lower your monthly payments. Keep in mind: The IRS treats forgiven debt as income, so you’ll need to report it on your tax return.
Convert to a fixed-rate mortgage from an adjustable rate: The interest rate on an adjustable-rate mortgage moves up and down. If it goes up, your monthly payments might no longer fit into your budget. Swapping to a fixed-rate mortgage gives you more financial stability.

Loan modification programs

There are different mortgage loan modification programs for different types of loans, including:

Conventional loan modification: If you have a conventional mortgage backed by Fannie Mae or Freddie Mac, you might be eligible for the Flex Modification program, which can reduce your monthly payments by up to 20 percent, extend the loan term up to 40 years and potentially lower the interest rate.
FHA loan modification: There are a few options for an FHA loan modification, including an interest-free loan for up to 30 percent of your balance or a 40-year loan extension.
VA loan modification: If you have a VA loan, you might be able to roll the missed payments back into the loan balance and work with your lender to come up with a new, more manageable repayment schedule. You can also request a 40-year extension to your loan term.
USDA loan modification: With a USDA loan, you can modify your mortgage with an extended term of up to 40 years, reduce the interest rate and receive a “mortgage recovery advance,” a one-time payment to bring the loan current.
A mortgage loan modification is a solution for borrowers facing long-term financial hardship. “If you’ve experienced a permanent loss of income and are falling behind on your mortgage, a loan modification might be right for you,” says Andrew Dehan, senior writer at Bankrate. Work with your lender or servicer to see if a loan modification is the best strategy for you.
Keep in mind that you might pay more interest on your mortgage with a loan modification, but this isn’t a given. “If the modification means extending the term of the loan — which is often the case — you will pay more interest,” says Seth Bellas, a producing branch manager for Canopy Mortgage in Michigan. “A common modification is taking the amortization of the loan from 30 years to 40 years, which would mean you are paying the principal at a slower rate, and thus paying more interest.”
However, if the loan modification helps you stay in your home, you might not mind that trade-off.