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How Does Mortgage Modification Work?

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When you’re experiencing a financial hardship, it can be challenging to stay current on your mortgage. A mortgage modification, including the Flex Modification program for borrowers with a conventional loan owned by Fannie Mae or Freddie Mac, adjusts the original terms of your loan to help make your mortgage payments more affordable.

This is especially true for the millions of homeowners who are affected by the coronavirus pandemic and struggling to meet their monthly mortgage obligations. Some form of mortgage relief, such as a mortgage modification program, could provide much-needed assistance during this critical time.

What is a mortgage modification program?

A mortgage modification changes the original terms of your home loan. Your lender can modify your loan in a few different ways, including:

  • Adding your past-due balance to your outstanding loan amount and recalculating your repayment term.
  • Extending your repayment term, for example, going from 25 to 30 years.
  • Lowering your mortgage interest rate.
  • Reducing your outstanding principal balance.

The purpose of participating in a mortgage modification program is to make your mortgage more affordable to manage. Modifications can be especially helpful for homeowners who are experiencing a temporary hardship and need mortgage relief.

A note about modification after forbearance

If you’re participating in a mortgage forbearance program and can’t afford any of the other available options to bring your loan current, due to an ongoing financial hardship, a loan modification may work best for your circumstances.

Loan modification vs. refinance

A loan modification shouldn’t be confused with a mortgage refinance. You replace your existing mortgage with a brand-new one when refinancing. You go through an underwriting process similar to the one you experienced when first getting a mortgage to buy your home. A modification, on the other hand, changes the terms of your existing mortgage but doesn’t replace it.

Refinancing your mortgage usually comes with closing costs and fees, just as your original mortgage did. A modification typically doesn’t involve closing costs.

Borrowers who choose to refinance aren’t required to stick with their current lender; they can comparison shop. A loan modification doesn’t change your lender.

A mortgage refinance makes sense if you’re able to get a new loan with better terms and can qualify to do so, but be sure you exceed minimum requirements for your credit score, down payment amount, employment, income and debt-to-income (DTI) ratio. There are fewer home loans available for borrowers with lower credit scores and higher loan-to-value (LTV) ratios, according to the Mortgage Bankers Association’s latest Mortgage Credit Availability Index.

But if you’re on the verge of missing a mortgage payment or are already in default, a mortgage modification might be the better option for you.

Qualifying for the Flex Modification program

One of the more common modification options is the Flex Modification program from government-sponsored enterprises Fannie Mae and Freddie Mac. It applies to struggling borrowers who have conventional loans that are owned by one of the two agencies and provides a 20% payment reduction for eligible borrowers.

The Fannie Mae and Freddie Mac Flex Modification program has several borrower requirements that apply to different circumstances, but below we list some of the general criteria. Flex modification program requirements include:

  • Be in imminent default, which means you’re expected to fall behind on your mortgage payments in the next 90 days, or already be 60 or more days delinquent.
  • Have a mortgage that originated at least 12 months prior to the modification evaluation date.
  • For borrowers in imminent default, the loan must be attached to their primary residence.
  • Have a mortgage that hasn’t been modified at least three times in the past.
  • Have not failed a “Flex Modification Trial Period Plan” over the last 12 months.
  • Submit a borrower response package if you’re less than 90 days behind on your payments (more on this below).

You can use the loan lookup tools offered by Fannie and Freddie to find out which agency owns your loan. If one of them does own your loan, you may be eligible for the Flex Modification program — provided you meet the other requirements.

Each lender will have different requirements before they’ll consider a mortgage modification. If you’re pursuing a modification directly with your lender, they may have different or additional requirements. Be sure to verify their guidelines by reaching out for more information.

How to apply for a Flex Modification

The first thing you should do after determining whether you have a mortgage owned by Fannie Mae or Freddie Mac is to reach out to your loan servicer to apply for the Flex Modification program. If you’re less than 90 behind on payments, you must complete a borrower response package.

The package should include:

  • A complete and signed mortgage assistance application.
  • A complete and signed IRS Form 4506-T or 4506T-EZ, which grants access to your tax return transcript.
  • Income documentation, which varies based on the type of income.
  • Hardship documentation, which varies based on the nature of the hardship.

There’s a streamlined application option for borrowers who are at least 90 days behind that doesn’t involve completing and submitting a borrower response package.

Other mortgage modification programs

Both the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) have mortgage modification programs for eligible borrowers.

The FHA loan modification program helps struggling homeowners by using one of the following options:

  • Adding late payments to their principal balance.
  • Extending their loan term.
  • Lowering their interest rate.
  • Reducing their outstanding balance by up to 30%.

Eligible borrowers must:

  • Not qualify for other mortgage assistance programs.
  • Have a DTI ratio of no more than 31% on the front end and 55% on the back end.
  • Complete a three- to four-month trial, which depends on whether you’re in default or imminent default.

VA loan borrowers who qualify for a modification may receive help by:

  • Having their past-due amount added to their outstanding principal balance and calculating a new repayment schedule.
  • Extending their loan term and getting a lower monthly payment.

Eligible borrowers must:

  • Have made at least 12 monthly payments since your mortgage closing.
  • Demonstrate your ability to repay the mortgage and not default.
  • Not have had any loan modifications over the past three years.
  • Not have had more than three loan modifications since your mortgage closing.

6 tips to avoid loan modification scams

Unfortunately, there are people who aim to wrongly profit off consumers facing difficult times by creating mortgage modification program scams.

Modification scams typically relay false promises of saving you from foreclosure, and instead, take your money. Scammers may charge high, upfront fees to receive assistance or ask you to sign over the title to your home, just to name a few examples, according to the Consumer Financial Protection Bureau (CFPB).

Do your due diligence when seeking mortgage assistance and verify you’re receiving legitimate loan modification help. The Federal Trade Commission recommends the following six tips to avoid a modification scam:

  1. Don’t pay any upfront fees.
  2. Don’t send your mortgage payments to anyone but your lender or servicer.
  3. Don’t fall for official-sounding names, such as the “Federal Assistance Program,” for example.
  4. Don’t rely on a forensic loan audit for foreclosure prevention. These “auditors” often charge hundreds and claim they can accelerate the modification process or cancel your loan.
  5. Don’t let anyone convince you to stop making your monthly mortgage payments.
  6. Don’t do business with a company that guarantees you’ll be granted a loan modification.

File a complaint with the CFPB online or by phone at 855-411-2372 if you believe you might be the victim of a mortgage modification scam.


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