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What Homeowners Need To Know About The Loan Modification Process

Navigating the loan modification process can be confusing and stressful for homeowners struggling to make their mortgage payments. This article provides an overview of loan modifications, eligibility requirements, the application process, and tips for increasing your chances of approval.

What Is a Loan Modification?

A loan modification is an agreement between you and your mortgage lender or servicer to permanently change one or more terms of your mortgage contract to make your payments more affordable. Common modifications include:

  • Lowering your interest rate – This reduces your monthly payment by lowering the amount of interest you pay over the life of the loan.
  • Extending the repayment term – Stretching out the loan period from 30 years to 40 years, for example, lowers your monthly payment by reducing the amount you repay each month.
  • Adding missed payments to the loan balance – Known as capitalization, this increases the total amount you owe but may lower your immediate monthly payment.
  • Reducing the principal balance – Your lender agrees to reduce what you owe on the mortgage loan. This directly lowers your monthly payment.

Who Qualifies for a Loan Modification?

To qualify for a government-sponsored loan modification program, such as Making Home Affordable, you must:

  • Have an eligible financial hardship – This includes reduced income or increased expenses.
  • Owe no more than $729,750 on your mortgage.
  • Have obtained your mortgage on or before January 1, 2009.
  • Live in the home as your primary residence.
  • Owe no more than 125% of your home’s current value.

Your lender may approve a proprietary loan modification even if you don’t meet government requirements. Hardship and eligibility guidelines can vary.

The Loan Modification Process

Step 1: Contact your lender/servicer

As soon as you miss a payment or anticipate struggling to make payments, call your mortgage company. Ask about “loss mitigation” assistance to avoid foreclosure. Document whom you contacted and when.

Step 2: Complete and submit paperwork

Provide financial details like your monthly income and expenses. Submit the initial paperwork as soon as possible. Promptness is key as it may determine your eligibility. Expect requests for additional documents along the way.

Step 3: Trial period

If approved, you’ll enter a 3-4 month trial period with reduced mortgage payments. It’s essential to make the trial payments on time. Missing even one can jeopardize final approval.

Step 4: Final modification

Once you successfully complete the trial, your lender should offer a permanent loan modification agreement. Be sure to understand all modified loan terms before signing. Record key dates and deadlines.

Tips for Getting Approved

  • Act quickly – The sooner you apply, the better. Lenders favor homeowners who reach out at the first sign of financial trouble.
  • Stay organized – Keep detailed records of all communications with your bank. Follow up conversations in writing.
  • Be transparent – Clearly explain your financial hardship and provide accurate supporting documentation. Omitting or misrepresenting information can disqualify you.
  • Explore all options – If denied at first, find out why and consider alternatives like repayment plans or forbearance before reapplying.
  • Consider assistance – Nonprofit housing counselors can help prepare your application and negotiate with lenders at no cost.

The loan modification process takes time but can provide much-needed payment relief. With diligence and patience, homeowners can successfully modify their mortgage terms and avoid foreclosure. Consult with a housing counselor or attorney if you have any questions along the way.


U.S. Department of Housing and Urban Development (HUD) – Avoid Foreclosure

Consumer Financial Protection Bureau (CFPB) – Mortgage Help

Find a HUD-approved housing counselor


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