What is a loan modification, and how will it help me with my mortgage?

A loan modification occurs when a homeowner enters into an agreement with his or her mortgage loan servicer to change the terms of the mortgage. The goal of a loan modification is to lower monthly mortgage payments to a level that homeowners can better afford, thus decreasing the risk of foreclosure. Typically, loan modification programs are targeted at homeowners whose ability to afford their current mortgage payment has declined, either due to job loss, increased interest rates, decreased home values, or other similar circumstances.

The exact provisions of loan modifications vary among loan servicers. For instance, some programs may reduce your payments and/or interest rate on your loan for a certain period of time. Other programs may make permanent modifications to your loan. Again, different loan servicers may have different loan modification programs, so you’ll need to check with your loan servicer in order to find out the terms of any available loan modification programs, or other programs designed to help you stay in your home.

Under the Homeowner Affordability and Stability Plan, loan modification will lower your monthly mortgage payment to an interest rate that is not more than approximately 31% of your monthly gross income. You will be given a trial period of three months under the new interest rate, and a new monthly payment schedule. If you are successful in making your payments during the trial period, you can enter into a loan modification that lasts five years. After five years, your interest rate will go up again at a rate of no more than 1% per year; however, your interest rate will never be higher than the current market interest rate on the date that you entered into the loan modification agreement with your loan servicer.

Furthermore, if reducing the interest rate on your mortgage loan is not enough to bring your monthly payment below 31% of your gross monthly income, then your loan servicer can use other options to reduce your monthly payments to that level. For instance, your loan servicer could forgive part of the principal balance of your loan, defer part of the balance, to be paid at a later date, and /or extend the repayment period on your loan for up to 40 years.

Other Foreclosure FAQs

Q: How do creditors get paid when foreclosing on a house to satisfy unpaid debts?
A: A foreclosure is where the creditor collects its lien by forcing a sale of the debtor's real property. The creditor receives the amount of the proceeds from the sale … More
Q: What is the Homeowner Affordability and Stability Plan?
A: Congress recently passed the Homeowner Affordability and Stability Plan (“the Plan”), which provides various options for homeowners who are feeling the … More
Q: When and why does foreclosure begin?
A: Lenders will initiate foreclosure proceedings when homeowners become delinquent in their mortgage obligations, usually after three payments are missed. The lender … More
Q: How long does it take to get a loan modification?
A: The length of time that it takes to get a loan modification depends greatly on how long it takes your mortgage holder to process your loan modification, as … More
Q: I have already filed for bankruptcy. Will the Homeowner Affordability and Stability Plan help me keep my home?
A: While the Plan does not contain specific provisions about consumers who are already in bankruptcy, the Helping Families Save Their Homes Act of 2009, which is … More
Q: What do I need to give to my loan servicer if I am requesting a loan modification?
A: You are likely to need the following documents for your loan modification request: · Recent paystubs or … More
Q: How do I know if my loan servicer is participating in the Homeowner Affordability and Stability Plan?
A: You should check with your loan servicer to see if it is participating in the Plan. If your loan servicer is not participating in the Plan, you should still … More
Q: What are the basic eligibility requirements for a loan modification under the Homeowner Affordability and Stability Plan?
A: You must meet some minimum eligibility requirements in order to qualify for a loan modification under the plan: · … More
Q: Are all mortgage loans eligible for refinancing or loan modification under the Homeowner Affordability and Stability Plan?
A: Yes, most types of loans, including adjustable-rate mortgages, prime or sub-prime mortgages, and loans through Freddie Mac, Fannie Mae, or private lenders are … More
Q: Will I be ineligible for a loan modification under the Homeowner Affordability and Stability Plan if I am current in my mortgage payments?
A: No. You may still be eligible for a loan modification under the Homeowner Affordability and Stability Plan if you are current in your mortgage payments, but you are … More