What Is Loan Modification? A Mortgage Relief Option
If you’re having trouble keeping up with your mortgage payments and need more than a temporary solution, a loan modification can adjust the original terms of your mortgage to help you avoid foreclosure.
But before you permanently alter the terms of your mortgage, make sure you understand when it makes sense to get a loan modification. We’ll cover the pros and cons of mortgage modifications and highlight other options for managing mortgage payments when you’re struggling financially.
How does mortgage loan modification work?
A mortgage modification changes the original terms of your home loan to make your payments more manageable. Your lender can modify your loan in a few different ways, including:
- Lowering your mortgage interest rate
- Extending your repayment term
- Reducing your outstanding principal balance
- Adding your past-due balance to your outstanding loan amount and recalculating your repayment term
- Converting your loan type (for adjustable-rate loans or interest-only mortgages)
| Modification type | Effect | |
|---|---|---|
| Lowering your mortgage interest rate | → |
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| Extending your repayment term | → |
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| Reducing your outstanding principal balance | → |
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| Adding your past-due balance to your outstanding loan amount and recalculating your repayment term | → |
|
| Converting your loan type (for adjustable-rate loans or interest-only mortgages) | → |
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Remember: The ultimate purpose of participating in a mortgage modification program is to make changes to your mortgage that’ll help you avoid missed payments and foreclosure.
| Good for: | Not the best option for: |
|---|---|
Long-term financial troubles. Homeowners who are experiencing a hardship that doesn’t have a clear end in sight. A next step after forbearance. If you are already participating in a mortgage forbearance program, but can’t afford any of the options that would bring their loan current after forbearance ends. | Temporary setbacks. Those people who are recovering from a temporary problem (like a short-term illness or injury) may not need to make a permanent change to their mortgage. Job loss. In most cases job loss is not permanent and can be better addressed through mortgage forbearance or refinancing. Saving money. If you just want to save money, but aren’t experiencing a specific hardship, loan modification isn’t for you. Instead, explore ways to lower your mortgage payments. |
How to get a mortgage loan modification
The loan modification process can vary from lender to lender, but in general most programs will require similar steps:
Step 1: Gather information about your financial situation
If you have documentation about your income, PITI payment amounts, HOA payment amounts and property value at the ready, that will make the process a lot less frustrating.
Step 2: Reach out to your lender
Because your mortgage loan is a legal agreement between you and your lender, you can’t modify your home loan without the lender’s approval.
Step 3: Check the qualifications for loan modification
Different lenders and programs will have different requirements you’ll need to meet in order to modify your loan. Before you launch into the loan modification application process, review your program’s basic qualifications.
Step 4: Complete an application
You’ll need to submit information and documentation about your financial situation to your lender in order to help explain why you’re experiencing hardship. Depending on the program, you may need to submit a “hardship letter” that details your situation in narrative form.
Step 5: Complete trial payments
In some cases, you may need to make a series of “trial payments,” which show the lender you’re able to make on-time payments consistently. If you fail to make these payments, you could lose your chance to modify your loan. The trial period typically lasts three to four months.
Step 6: Await the final verdict
Your lender will either approve or deny your application. If you’re approved, you’ll get an offer that details the terms of the new loan. If you’re denied a loan modification, there are other options that can help you either afford or exit your mortgage without going through foreclosure.
Qualifying for the Flex Modification program
One of the most common loan modification options is the Flex Modification program offered by government-sponsored enterprises Fannie Mae and Freddie Mac. The program can provide a 20% reduction in how much you have to pay monthly toward your mortgage — but it’s only available to struggling borrowers who have conventional loans that are owned by one of these two agencies.
The Fannie Mae Flex Modification program and the Freddie Mac Flex Modification program have many requirements that apply to borrowers in different circumstances, but in general these programs require that you:
- Be in imminent default. This means you expect to fall behind on your mortgage payments in the next 90 days, or already at least 60 days delinquent.
→ For borrowers in imminent default, the loan must be attached to their primary residence. - Have a mortgage that’s at least one year old. Your mortgage origination date must be at least 12 months prior to the modification evaluation date.
- Haven’t already modified the loan too many times. Your mortgage must not have been modified three or more times.
- Have kept up with your trial payments. You may not be eligible if you’ve failed to make the payments you agreed to in a Flex Modification Trial Period Plan.
- Submit a borrower response package (BRP). This is essentially the application for a modification, and will ask you to provide information and documentation about your finances, your hardship and your home. Fannie Mae requires a BPR if you’re less than 90 days behind on your payments, while Freddie Mac requires it for all borrowers (more on this below).
Unsure if Fannie or Freddie owns your loan?
You can use Fannie Mae’s loan lookup tool or Freddie Mac’s tool 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 its other requirements.
Pros and cons of loan modification programs
| Pros | Cons |
|---|---|
You’ll still be able to refinance in the future It’ll take less time to rebuild your credit after a loan modification than it would after foreclosure It’s a long-term solution, not a short-term fix | Your credit score could take a hit, depending on how your lender reports the loan modification Any missed payments from before the modification will still negatively impact your credit You’ll still face foreclosure if you don’t keep up with your payments You may not be eligible if the mortgage you want to modify isn’t attached to your principal residence You may not be eligible if your financial hardship is due to job loss |
Loan modification programs for FHA and VA loans
Both the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) have mortgage modification programs for eligible borrowers.
FHA loan modification
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
Good news for FHA loan borrowers: COVID-19 protections extended to everyone
The FHA has extended all of its COVID-19 loss mitigation options to all borrowers with FHA loans — regardless of the reason for their financial hardship — through Feb. 1, 2026. These include loan modifications but also partial claim loans, regular and unemployment-specific forbearance options, as well as combinations of these strategies.
However, you won’t be able to access these options unless you’re 61 or more days behind on your payments.
VA loan modification
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:
- Be in mortgage default
- Still be living in the home
- Complete a trial payment plan
Alternatives to loan modification
Loan modification vs. refinance
If you don’t qualify for loan modification, don’t panic — you can still potentially refinance your mortgage. Like modifying your mortgage, a refinance permanently changes your loan. However, instead of modifying the existing loan, it uses a new loan to pay off your original mortgage. You’ll then continue to make payments based on your new loan’s terms.
When a loan modification makes more sense:
- You’re already behind on your mortgage payments. It’s going to be tough to refinance if you’ve already fallen behind on one or several mortgage payments — most lenders don’t want to issue a new loan to someone who has a recent history of missing payments.
- You’re “underwater” on your existing mortgage. If you owe more than your home is worth, you typically won’t be able to refinance a conventional loan. However, if you’re underwater on a government-backed loan, you may be able to qualify for a streamline refinance loan.
- You’re hoping to have part of the loan’s principal balance forgiven. In some cases, a loan modification increases your principal balance, but in others it forgives some of that balance. Refinances, on the other hand, can increase your balance, but can’t reduce it.
When a refinance makes more sense:
- You’re not behind on your payments yet, but if something doesn’t change you will be soon. If you’re still holding onto your solid credit and a pattern of on-time payments, now — before you fall behind — is the time to seek a refinance.
- Interest rates are significantly lower than when you took out your loan. A good rule of thumb is that a refinance may be an attractive option if it can reduce your interest rate by at least 0.50 percentage points. Unfortunately, with today’s rates and mortgage forecast looking the way they do, you’re unlikely to find lower rates now unless you’ve significantly improved your credit.
- You’ve taken closing costs into account. A refinance will typically come with closing costs of around 2% to 6% of the loan amount. This is fine, as long as you can afford these costs and plan to stay in your home long enough to break even on the refinance.
Forbearance
Forbearance is a temporary pause or reduction in your mortgage payments, whereas loan modification permanently alters your loan. You can also enter loan modification after a forbearance period — the two aren’t mutually exclusive, but they are different.
Typically, once your forbearance period ends you’ll have to do one of the following:
- Covering all of the payments you missed in one lump sum.
- Making larger monthly payments until the missed payments are fully repaid.
- Nothing until you either pay off your mortgage or sell the home, at which point you’ll have to repay the entire missed payment amount.
How does forbearance affect my credit?
Because forbearance doesn’t alter the original loan agreement, you’re technically in mortgage default during the forbearance period. If your lender chooses to report the payments you’re not making during forbearance to the credit bureaus, that would negatively affect your credit — but most lenders don’t. Typically, as long as your lender is on board with forbearance and you’re keeping up your end of the deal, your credit won’t suffer.
However, if you fail to do what you promised to in the forbearance agreement, things can get messier. In some cases, when borrowers violate the forbearance agreement, the lender turns around and takes legal action against them — and uses the forbearance agreement as evidence in court to prove their case.
Short sale
A short sale is when your lender agrees to let you sell your home for less than it’s worth. In return, the proceeds of your home sale will go toward your outstanding mortgage debt. The debt that remains after this — called the “deficiency” — is often forgiven.
Deed-in-lieu
A deed-in-lieu of foreclosure is when you hand over ownership of your house to your lender “in lieu” (or instead) of going through the foreclosure process. In return, you’ll be released from the mortgage. Lenders are often motivated enough to avoid foreclosure that they’ll strike this deal with you — and, in some cases, cover your relocation expenses to boot.
Partial claim
A partial claim is a loan that covers the amount you’re behind on your mortgage payments so you can get current. The best part is that it’s an interest-free loan, and typically won’t have to be repaid until you pay off your first mortgage in full or sell the house. The downside? It only applies to certain loan types, like FHA loans.
Bankruptcy
Deciding to file for bankruptcy can be tough, but one of the best things about taking the leap is that it immediately puts a freeze — also known as an “automatic stay” — on any creditors who are trying to collect debts from you or enforce liens. Filing for bankruptcy will stop foreclosure, but whether this is enough to help you keep your home, or if it’s just a temporary fix, depends on the type of bankruptcy you’ve filed for.
How to avoid loan modification scams
Remember: It’s against the law for a business that promises it will help you obtain a loan modification to collect any upfront fees from you before you’ve signed a new loan agreement with your lender. Do your due diligence when seeking mortgage assistance and verify that you’re receiving legitimate loan modification help. File a complaint with the Consumer Financial Protection Bureau (CFPB) online or by phone at 855-411-2372 if you believe you might be the victim of a mortgage modification scam.