What homeowners should know about loan modification

Loan modification may be an option for borrowers who aren't able to refinance.

Loan modification may be an option for borrowers who aren't able to refinance.


Anyone with a mortgage is about to start hearing one word much more often, if they haven't already: refinance. With interest rates dipping even lower than their already historically low rates, lenders will likely be soliciting homeowners with renewed vigor to refinance through their programs. Indeed, this may already be happening. According to the latest data from the Mortgage Bankers Association, mortgage applications are up 64 percent over this time last year. The bulk of this activity is coming from refinances.

"For those who can't refinance, loan modification may be an option."

However, there are some caveats to the latest rush to convince borrowers to refinance. Primarily, according to an analysis from Realtor.com, refinancing opportunities are generally only favorable, or even available, to homeowners with good credit. Realtor.com found that refinancing applicants had high FICO scores, low debt-to-income ratios and more equity built up. 

Does this leave homeowners with bad credit, low equity or little spending money out of luck? Not necessarily. Borrowers who aren't eligible or may not benefit from a refinance could also consider requesting a modification to their home loan. In essence, this is a renegotiation of the loan contract's terms with the current lender. The end result is not unlike that of a refinanced loan. However, neither is it a magic bullet for those who may be behind on their mortgage payments.

Modification basics

Before getting into a loan modification, homeowners should be aware that it could take a significant amount of preparation. According to real estate law professional Adela Ulloa, who spoke to Realtor.com about the modification process, the borrower can't dawdle either - they should let their lender know as soon as possible if they are have difficulty making payments. Lenders will often prefer to change the loan's rules rather than go through the tedious foreclosure process, so a modification can be mutually beneficial.

While applying for a modification is complicated, there are ways to ease the burden. The U.S. Department of Housing and Urban Development provides useful guides and forms for modification procedures at MakingHomesAffordable.gov. Per the website's information, borrowers will need to have several documents at the ready, including:

  • A monthly mortgage statement for every mortgage on the home
  • Income verification, such as pay stubs, profit statements or benefits information
  • Two most recent tax returns and bank statements
  • A utility bill at the address for the loan
AgreementKnow what you're signing before agreeing to a loan modification.

Finally, and perhaps most importantly, the borrower will need to provide a letter explaining why they are seeking a modification. It helps to be as upfront and honest as possible in this letter so that a lender can get an accurate assessment of a borrower's situation or hardship.

Is it a good idea?

The terms of a mortgage combined with the borrower's personal financial history mean that there's never a cut-and-dry solution to these issues. As U.S. News & World Report noted, most modification agreements involve allowing the borrower to make smaller monthly payments, helping them get back on their feet in the short-term. However, this also means the life of the loan could be extended, meaning more time and money spent paying it off. 

Loan modifications happen under stressful circumstances, so it's incredibly important to get all the details right and understand what's changing when. With the right preparation, a loan modification can end up benefiting homeowners who may have fallen on tough times, or those who just want to get the most out of their relationship with a lender.