What Are Loan Modifications? A Guide

Sometimes, you can't make the payments as stated by your original mortgage loan. In these instances, you might qualify for a loan modification, which can help you avoid foreclosure and keep ownership of your property.

But what are loan modifications, how do they work, and are they right for you? Read on to discover the answers to these questions and more.

What Are Loan Modifications?

A loan modification is any type of modification, or change, made to an existing mortgage — making it easier for you to keep up with your mortgage payments. Depending on the terms of the loan modification, you might receive a new interest rate, have a different repayment schedule, or something else entirely.

In any case, loan modifications are important tools because mortgage lenders always want to avoid foreclosure. It’s much better in the financial long run for lenders to ensure that their borrowers can continue to make loan payments, even if those payments are smaller than the original agreement. The foreclosure process is costly and time-consuming — for both the borrower and the lender, so it is in their best interest to make new arrangements and work with you.

Going through the loan modification process is often preferable over other strategies, like mortgage forbearance, a deed in lieu of foreclosure, or a loan refinance. Loan modifications don’t impact your credit score nearly as much as the aforementioned options, and you have the convenience of staying with the same loan servicer.

How Do Loan Modifications Work?

To get a loan modification, you need to speak to your mortgage lender. For example, if there's a risk of foreclosure in the future, you can ask your lender to modify your original loan to make it easier for you to stick to your monthly payments.

Depending on what you and your lender work out, your loan modification can take several different forms, such as:

  • A reduced interest rate, so you can enjoy lower overall monthly payments and pay less for the mortgage in the long run.
  • An extended repayment period. By lengthening your loan’s term, you’ll also lower your monthly mortgage payments, though you’ll need to pay more over time via interest.
  • A reduction in the principal. With this loan modification, the lender agrees to forgive some of your loan balance in order to lower your monthly payments overall.
  • A conversion to a fixed-rate mortgage from an adjustable-rate mortgage. This is oftentimes ideal, as a fixed-rate mortgage has more consistent payments compared to an adjustable-rate mortgage.

In any case, it’s best to speak to a housing counselor about your financial situation. They can help you determine whether this or something like refinancing your home loan might be better for your personal finances.

What Types of Loan Modification Programs Exist?

There are several types of loan modification programs you can pursue if you are a homeowner facing foreclosure

Some examples include:

  • Conventional loan modifications, which are available for conventional mortgages owned by Fannie Mae or Freddie Mac. This is done through the Flex Modification program
  • FHA loan modifications, which include options like interest-free loans for up to 30% of your remaining loan balance. However, you’ll need to prove significant financial hardship on your bank statements to qualify for a modification to your current mortgage
  • VA loan modifications, which enable borrowers to roll back missed payments into the loan balance and work with their lenders to come up with more manageable repayment schedules
  • USDA loan modifications, which enable borrowers to modify mortgages with extended terms for up to 40 years or reduce interest rates. USDA loan borrowers can also sometimes take advantage of mortgage recovery advances, which are one-time payments to bring loans current

If any of these programs sound interesting, ask your lender about what you may qualify for.

When Do You Qualify for a Loan Modification?

Not everyone can immediately approach their lender for a loan modification. 

In most cases, you’ll only qualify for a mortgage modification if you meet the below requirements:

  • You must be at least one month behind on your loan or about to miss a mortgage payment.
  • You must have a significant financial hardship, like an illness, disability, death of a family member, divorce, or natural disaster, and be able to prove that the financial hardship has affected you.
  • You must live in the property as your primary residence.

How To Apply for a Loan Modification

If you qualify, applying for a loan modification is relatively straightforward.

First, gather the proof of your financial hardship, then contact your mortgage servicer. Prepare ahead of time to make your case and be persuasive about your need for a loan modification.

Once you connect with your lender or servicer, work out a loan modification plan. They may negotiate with you on the exact terms and conditions of the modification. If needed, stress the fact that you are unable to make payments as they are currently required. Most lenders will be happy to work with you through a loan modification if you can prove it’s absolutely necessary.

How Does Loan Modification Compare to Home Equity Investment?

It’s clear that a loan modification could be just what you need, especially if you need long-term mortgage relief. However, you may not qualify for a loan modification for one reason or another, such as not having the right kind of loan or not being able to provide appropriate proof of hardship.

If your lender denies you a loan modification, a home equity investment can help you avoid foreclosure. With a home equity investment, a property investor purchases an equity share in your home, sometimes paying you a lump sum in cash based on how much equity you’ve built up so far.

In exchange, the home equity investor receives profit from the equity appreciating over time. At the end of the home equity investment term, you can then pay back the investor for whatever the equity is worth, regaining 100% ownership of your property.

Home equity investments give you access to immediate equity capital and often result in reduced or no mortgage payments. When you co-own with Balance, we’ll replace your mortgage loan with an equity investment. This way, your mortgage would be paid off, and you'll simply make a monthly payment to Balance to cover your occupancy of the home and your share of the insurance and taxes.

Contact Balance Today

In the end, a loan modification can help you keep your home and escape the possibility of foreclosure. But loan modifications aren’t available to every American, and if you have a conventional loan, you may need an alternative solution.

That's where Balance comes in. With Balance, you become a co-owner of your property and retain the right to buy us out at any time. Unlike other options where you may be forced to forfeit your home, Balance allows you to stay on the title and access your equity to consolidate your debt, repair the property, build up your credit, save cash, and strengthen your overall financial profile. 

Contact us today to learn more.


What is a mortgage loan modification? | Consumer Financial Protection Bureau

Foreclosure Process | U.S. Department of Housing and Urban Development (HUD)

What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan? | Consumer Financial Protection Bureau

What Is a Home Equity Sharing Agreement? | NerdWallet