What is a home loan modification and how does it work?

Written by: Anna Baluch
• Updated •4 min read • Leer en español
A woman holding a document sits on the floor and uses her laptop and cellphone to assess her finances.Image: A woman holding a document sits on the floor and uses her laptop and cellphone to assess her finances.

In a Nutshell

A home loan modification can help you avoid foreclosure. But the requirements depend on the program you pursue, and you must get approval.
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If you’re struggling to make your mortgage payments, a home loan modification may be a good option.

It can help you avoid foreclosure and make your monthly payment more affordable. Unlike a refinance, a home loan modification doesn’t pay off your current mortgage and replace it with a new one. Instead, it changes the terms of the loan.

With a home loan modification, you may be able to arrange more time to repay your mortgage, a lower interest rate or a reduced principal balance.

If a home loan modification is on your radar, here’s what you need to know.

Who is eligible for a loan modification?

Struggling to make a mortgage payment doesn’t automatically qualify you for a home loan modification. In general, you must be delinquent or on the verge of default because of a specific hardship.

Depending on the program, qualifying hardships may include events like a lost job, a divorce or another change in marital status, a disability or an illness, among other things.

Let’s look at some loan modification programs and what they require.

Flex Modification program

If you took out a conventional loan, and you meet the requirements of the Flex Modification program, you may apply for up to an estimated 20% reduction on your mortgage payments.

Some of the qualifying conditions for the Flex program include that …

  • You’re in danger of falling behind on your payments in the next 90 days or are already 60 or more days past due on them
  • Your mortgage is owned in whole or in part by Fannie Mae or Freddie Mac and is 12 months or older at the time of evaluation
  • You haven’t changed your mortgage more than three times
  • You haven’t failed a “Flex Modification Trial Period Plan” over the preceding 12 months
  • You’ll provide a “borrower response package” documenting things like your income and the type of hardship you’re experiencing

FHA loan modification program

The FHA loan modification program (FHA-HAMP) is worth considering if you have an FHA mortgage. It may allow you to extend your loan term, reduce your interest rate, add late payments to your principal balance or lower your unpaid, outstanding balance by up to 30%.

You can take advantage of it if:

  • You’re ineligible for other mortgage assistance programs
  • You complete a three-month trial

VA loan modification programs

If you have a VA loan, the VA loan modification programs can add your past-due payments to your principal balance and create a new repayment schedule. It may also extend your loan term so you can have a lower monthly payment. The VA loan modification programs come with these requirements.

  • You’ve made at least 12 monthly payments.
  • Your financials prove that you can repay the mortgage and avoid default.
  • You haven’t had any loan modifications over the past three years.
  • You haven’t had more than three modifications since you closed on your mortgage.
  • You’ve completed a three- or four-month trial period.

USDA loan modification program

If you’re a USDA loan borrower, you may be able to extend your term by up to 480 months or 40 years. This can result in lower payments and make it easier for you to afford your mortgage thanks to the additional time given.

But there’s little information offered about this program on the USDA’s site, so you’ll need to contact your loan servicer to learn more about your modification options with a USDA loan.

What are the benefits of a loan modification?

Put simply, a loan modification can help you catch up financially and remain in your home if you’re at risk of foreclosure. The modification may lower your payments to something you can afford, and could help you start rebuilding your credit.

How to get a loan modification

Loan modifications aren’t automatic. If you find it difficult to make your payments and you’re worried about foreclosure, you’ll need to initiate a conversation with your lender or loan servicer to get the ball rolling.

Making sure you meet the criteria of any loan modification program will be part of the process. Your lender or loan servicer should be able to guide you — but if you have trouble communicating with your lender, there are FHA, VA and HUD resources that can help.

How late is too late to get a loan modification?

Loan modification programs all have their restrictions. For example, if you’ve already made changes to your mortgage more than three times, you can’t pursue the Flex Modification program.

And with the VA loan modification program, you’ll have a chance only if you haven’t altered your loan over the past three years.

Double check the requirements of the program you’re considering to make sure it’s not too late.

What’s next?

You can get help deciding whether to pursue mortgage modification by talking to a HUD-approved housing counselor. You can call the Department of Housing and Urban Development at their central number to request a referral to a housing counselor near you.

If you decide modification make sense for your situation, reach out to your lender to learn more about the process. Act quickly to avoid the risk of foreclosure.

About the author: Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt Un… Read more.