Loan Modification Requirements – Find out If You Are Eligible for This Mortgage Relief Option

If you are having difficulty affording your mortgage payments, a loan modification is one of the relief options you can leverage.

It's often available to homeowners who have missed or are at risk of losing a monthly mortgage payment because they face financial issues or are in mortgage forbearance but might have trouble when it ends.

However, mortgage relief plans are different for each person. Therefore, you must consider your situation to determine if you are eligible for a loan modification.

In addition, those who have trouble paying monthly loan payments or go through financial hardship could also refinance a loan.

How to know if a loan modification is for you? Which are the requirements? Read on and find all the information you need to discover if you are eligible and more!

Loan Modification Requirements

Understanding Mortgage Loan Modifications

Before delving into the eligibility criteria, it's essential to understand this relief plan. It refers to when a homeowner avoids defaulting on monthly payments and is able to keep their property amid financial hardship through a mortgage modification to the existing loan's terms.

When you request a loan modification, the lender must agree to change the loan terms. This relief option aims at reducing a borrower's mortgage payments to help them afford the loan each month.

In order to achieve that goal and make the monthly payments fit a borrower's current budget, a lender may agree to lower the interest rate or extend the term to repay the loan. In some cases, both parties may also decide to switch from an adjustable rate to a fixed-rate mortgage.

However, it's important to understand that a loan modification does not replace the existing mortgage loan or change the lender, as a loan refinance does. In this case, the original terms are altered.

In other words, this relief option can restructure your loan to help you cover monthly payments when you experience financial problems. Also, if you are in mortgage forbearance, you can also rely on loan modifications if you still need mortgage assistance after it expires.

However, many lenders don't offer loan modifications. Therefore, if you need a relief plan so you don't default on your loan, you should contact your lender to try to come up with a solution.

How Mortgage Loan Modification Works

As mentioned, requesting a mortgage modification doesn't mean that you can change your lender or replace your current loan with a new one. Actually, the main amount owed remains the same.

Instead, the lender reaches an agreement with the borrower to make the loan more manageable by extending the payment terms or accepting a lower interest rate. Both options could help reduce monthly payments or how much interest you have to pay in the long run.

However, although the goal of a mortgage modification is to make monthly payments more affordable, lenders often request an extension on the loan term or add any missed payment to the loan. Consequently, the debt or the total amount of interest to be paid increases.

Unlike this option, a loan refinance reduces both the monthly payments and the total interest cost. Find more information about this alternative below.

Key Differences Between Loan Modification and Refinance

Both are popular relief options. However, most homeowners trying to lower monthly mortgage payments usually rely on a refinance to make the loan more affordable.

When you request a mortgage refinance, your original loan is exchanged for a new loan, but it often has a lower interest rate and a longer payment term.

This relief plan allows borrowers to enjoy a permanent reduction in their monthly payments without running the risk of affecting their credit score. However, a person going through financial hardship is usually not eligible for refinancing.

If you want to apply for a new loan, you must meet several requirements, including having a current mortgage loan in good standing, enough cash to cover costs related to the plan, a qualifying credit score, and a healthy debt-income ratio.

Therefore, if you go through a period of financial turbulence with reduced income, high-interest credit card debt, lower credit score, or other debt obligations, you may not qualify for a refinance loan.

Fortunately, in that case, you could rely on a mortgage modification to make the loan more manageable and adapt the monthly payments to your current situation. This relief option is often reserved for homeowners who cannot get a mortgage loan to replace their existing one through refinancing due to financial hardship.

Also Read:  Loan Modification vs. Refinance

When Should You Request Loan Modifications Instead of Trying to Refinance It?

Since the requirements are clear and different, homeowners shouldn't spend ages deciding on the best option. Both plans target different groups, and two people cannot be eligible for the same.

In simple terms, if you don't qualify for a loan refinancing, a mortgage modification may be for you or vice versa. In addition, choosing the right alternative depends on several factors, including the following:

  • Status of the existing mortgage
  • Personal finance
  • Agreement with the current lender or bank

If you have defaulted on mortgage payments and your credit score has been severely affected, a lender may be wary of your ability to repay the principal and interest. In these cases, it is not possible to get a refinancing.

However, mortgage loan modifications have been designed to provide relief to those who face that situation. You can work with your current bank or lender to modify the terms of the existing mortgage and avoid affecting your credit score.

Key Differences Between Loan Modification and Forbearance

Another option that a borrower facing financial stress can choose is forbearance. Through this temporary plan, mortgage payments are stopped while you recover or until you can pay back the debt.

During the Covid-19 pandemic, when many people lost their jobs or had reduced wages due to national and global financial conditions, many homeowners applied for mortgage forbearance to make their loans more manageable.

While it might be a difficult option to acquire right now, as many people applied for forbearance during the health crisis and most are now due, it's another one of the relief plans a homeowner can seek.

Compared to a loan modification, which is a plan that permanently alters both the interest rate and the loan terms, a forbearance typically lasts for a specific period.

A homeowner can combine a forbearance and mortgage modification if they're highly affected by financial problems and must create a more effective relief plan.

If your income plummets further or is still very low when the forbearance period ends, you may be eligible for a permanent loan modification.

In other cases, if the mortgage modification has already been approved, you could also seek an agreement to defer or hold the unpaid principal until the payment period ends.

Who Is Eligible For Loan Modifications?

Regardless of the reasons, any borrower facing financial hardship may qualify for a loan modification. However, all lenders often have different eligibility requirements.

Some lenders or banks only grant this relief option to those who have a late mortgage payment or face an imminent risk of missing one. Others also request detailed information to find out what caused the financial hardship or evaluate the borrower's situation to determine if a mortgage modification may actually make the loan more affordable.

Many borrowers lose their sources of income. Unfortunately, in these cases, a loan modification might not be enough to bring finances back to normal.

When the financial setback is so severe that you can't pay your mortgage, getting a mortgage modification is next to impossible. Borrowers with enough income or savings to make mortgage payments are also not eligible for these relief plans.

However, some people who start making less money because of a job change or other events can still make monthly payments if the cost or interest rate is lowered. Most of the time, they qualify for a mortgage modification.

If you think you qualify for a loan modification and apply for one, the lender may request proof that you are in financial trouble. Some of the most common reasons include the following:

  • Loss of income due to a job change or drop in wages
  • Loss of income due to the death of a family member
  • Increased housing costs
  • Divorce or separation
  • Illness or disability
  • Natural disasters
  • Health pandemic

A person facing financial problems should talk to their lender as soon as possible and find out if they qualify for a mortgage modification or determine if that relief option may be the ideal solution according to their situation.

In this scenario, some of the documents you might provide to show that you are experiencing financial difficulty include bank statements and two years' worth of tax returns.

However, you should keep in mind that the lender is not obligated to change the loan terms after the contract is executed. Therefore, your request to get a mortgage modification could be rejected.

How the Lender Can Modify the Loan

A mortgage lender can modify the loan in several ways, including making the mortgage term longer or lowering the interest rate to make the monthly payments more affordable. Explore each alternative in detail below!

Reducing the Interest Term to Lower the Monthly Payment

One of the ways to reduce monthly mortgage payment obligations is to lower the interest rate. Actually, this move could reduce monthly payments by hundreds of dollars.

Although this process is similar to refinancing, you would not get a new loan. Also, in a loan modification, you don't have to cover closing costs and fees.

Extended Loan Term to Reduce Mortgage Payments

Extending the loan term may also reduce mortgage monthly payment obligations. If you took out a loan of around $100,000 at an interest rate with 15 years left, for example, your monthly payments could go from $700 to as low as $500 if the term is extended for 10 more years.

However, any borrower leveraging this option should keep in mind that extending the loan term means they must pay more interest for longer.

Fixed-Rate Mortgage Instead of Adjustable-Rate Mortgage

Another strategy to help borrowers make their loans more affordable amid financial difficulties is to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

While this option doesn't reduce current payments, it can help borrowers protect their finances from potential future interest rate hikes since ARMs have floating rates and often change with the market.

Rising rate environments can have an impact on borrowers' finances, especially if they are facing financial difficulties. However, fixing the interest rate could solve this issue, as you can pay the same amount throughout the loan even if the market crashes or is rocked by volatility.

Rolling Late Fees Into the Principal

As a way to repay the loan, some lenders add accumulated late fees to the principal balance. In simple terms, the amount you owe is distributed as a new balance throughout the loan term.

Past-due charges that can be added to the principal balance often include interest, escrow, or late fees. Although the principal debt increases, the monthly payments could be reduced in this case if the lender agrees to extend the loan term.

Reduced Principal Balance

Some lenders may also reduce the amount a borrower owes. This option is known as a principal modification but is not as common as the others.

Principal balance reductions were common during the housing crisis, for example. Back then, home prices plummeted, and flexible lending standards took precedence over other options. Consequently, borrowers lost money through their home investments.

You can ask your lender to reduce the principal, but this action often depends on the current local real estate market. Other factors to consider are the amount of debt and how much you could lose if you continue down the same route compared to a foreclosure.

A Combination Of Several Options

If you need to make your monthly mortgage payment obligations more manageable, you may need to combine several relief plans. Some lenders may lower the interest rate and extend the loan term at the same time to significantly reduce the monthly payments without affecting the principal balance.

Overall, lenders often analyze a borrower's situation and need or perform a cost-benefit analysis to determine if combining multiple actions could benefit both parties.

Most Common Mortgage Loan Modification Programs

Common Mortgage Loan Modification

Depending on the type of loan you have, you could apply for several loan modification options. These are the most common programs.

Conventional Loan Modification

Private lenders often have their own loan programs with different modification guidelines. Fannie Mae and Freddie Mac, for example, offer borrowers flexible modification programs. These typically reduce the mortgage payment by up to 20% for those eligible.

Through flexible modifications, the lender can adjust the interest rate, extend the loan term, or forego a portion of the principal balance to make the monthly payments lower.

However, borrowers must meet some requirements to be eligible for a flexible loan modification program. These are:

  • Have at least three monthly payments due on the primary or secondary residence and investment property
  • Have less than three monthly payments due on an "imminently defaulting" loan (this option only applies to primary residences when the mortgage lender determines that the borrower cannot meet the payments without modifying the loan)
  • Experience an event that may cause imminent default, such as the death of a family member who was the main breadwinner in the household, disability, or serious illness

Although unemployment can cause financial hardship, it is not often considered a reason to grant a flexible loan modification. Therefore, most unemployed borrowers usually qualify for temporary forbearance plans.

Federal Housing Administration (FHA) Loan Modification

Granted by the Federal Housing Administration (FHA), these modifications aim at making loans more manageable for borrowers with delinquent payments.

Generally, the FHA analyzes each borrower's situation and offers one of the following possible solutions:

  • Lower the interest rate
  • Rolling overdue principal, unpaid borrowing costs, or interest on the existing loan
  • Extend the term
  • Pay off the mortgage to allow the borrower to make up missed payments

Borrowers who need additional assistance may also be eligible through the FHA-Home Affordable Modification Program (FHA-HAMP), which allows them to defer past due mortgage payments to bring the homeowners to their current loan.

FHA-HAMP recipients may also ask the FHA supervisor, HUD, to further reduce the monthly payment through an interest-free subordinated loan for up to 30% of the remaining loan balance.

In this case, the borrower payments and interest are calculated based on 70% of the balance since the rest of the principal can be returned if the house is sold or refinanced.

Through the additional principal amount deferment, FHA borrowers can catch up on their loans. Plus, you can combine this program with other alternative loan modifications to lower your monthly payment obligations.

Anyone planning to apply for an FHA loan modification must complete a test payment plan. It often requires borrowers to make payments on time for at least three months in a row (based on the modified amount). Otherwise, they would not be eligible.

Department of Veteran Affairs (VA) Loan Modification

Service members and veterans can also apply for a loan modification requirement through the Department of Veterans Affairs (VA).

Overall, this loan modification option involves reinvesting past-due payments in the loan balance. It can also include other costs, such as those associated with homeownership if the borrower is delinquent, such as property insurance or unpaid taxes.

Once the costs are added to the loan, the VA servicer must define a new payment schedule for the veteran or service member.

However, in this plan, the interest rate can be increased, which means that the borrower will not always enjoy reduced monthly payment obligations.

Some of the requirements that VA loan modification applicants must meet include the following:

  • Having a VA loan in default
  • Proof that the borrower can support the VA-modified loan's financial obligations
  • Proof that the borrower has recovered from the temporary difficulties that caused the default

VA loan borrowers may also qualify for a Streamline Modification. If you choose this option, you don't have to handle too much paperwork but must meet two additional requirements. These are:

  • Make sure the combined payment between principal and interest is decreased by at least 10%
  • Complete a trial payment plan, demonstrating that you can make the modified payments for at least three months

US Department of Agriculture (USDA) Loan Modification

Homeowners with current loans backed by the US Department of Agriculture can also apply for a loan modification.

Through the USDA loan modification, missed mortgage payments are often repaid to the existing loan balance. It includes principal, taxes, interest, and insurance. In some cases, this plan also allows the loan term to be extended up to 40 years in total, reducing the monthly mortgage payments.

The USDA also indicates that lenders or loan servicers can reduce the interest rate to below the market rate if necessary to help the borrower manage the debt.

Additionally, loan servicers can rely on a mortgage recovery advance to cover up to 30% of the homeowner's outstanding principal balance.

Alternatives to a Mortgage Loan Modification

If you're having trouble paying your mortgage loan payments or want to reduce them for any reason, a loan modification isn't the only option available. These are other alternatives you can consider:

Mortgage Refinancing

As mentioned, this option allows you to reduce the interest rate and payment, but you must meet some requirements to obtain a new loan. Therefore, it is difficult to qualify for a refinancing program if you are facing financial problems.

In addition, the difficulty of refinancing an existing loan also depends on its type. An FHA loan is easier to refinance because it requires fewer credit score requirements. These options are also often available to people with higher DTI ratios.

Refi Possible

Offered by Freddie Mac, this loan program allows low-income homeowners to refinance their mortgages and take leverage lower interest rates while paying less.

Refi Possible guarantees a 0.5% interest rate reduction, which could help you save considerably on your monthly mortgage payments.


Offered by Fannie Mae, this program also seeks to smooth out the cost of refinancing for low-income households. However, it offers several benefits, including a waiver for the cost of a home appraisal.

With this option, borrowers can take advantage of low-rate environments without worrying about borrowing costs impacting their savings.

Streamline Refinancing

This option is available to homeowners through FHA loans, USDA loans, or VA mortgages. It does not require rigorous documentation, such as verification of income or employment.

In some cases, those who benefit from these alternatives may forego the credit check since they are more lenient with those who have suffered a recession in their finances.

Final Thoughts

A loan modification can be a good alternative for borrowers who are struggling to cope with difficulties, affecting their financial situation since it can help them avoid foreclosure and keep their properties.

However, it can affect debt in the long run. Therefore, before requesting it, you should analyze your situation to make sure it is the option you need. Moreover, you should carefully review the option or entity you plan to work with. Otherwise, you could face loan modification scams.


Could a Mortgage Modification Hurt My Credit?

Federally backed loan modifications – including those issued by the VA, FHA, USDA, Freddie Mac, or Fannie Mae – do not typically impact a borrower's credit history when they result from a national or global event, such as a pandemic.

However, in some cases, credit modifications are reported as settlements or judgments, which could affect your credit.

How Long Does a Loan Modification Last?

This option is permanent, but the loan modification process could take anywhere from one to three months.

How Can I Get a Loan Modification?

If you need to modify your loan to reduce current mortgage payments or extend the term, you should contact your mortgage servicer or lender. It is important to inform them about your financial difficulties and inquire about the available loan modification options to find one that fits your situation.

What Do I Need to Apply for Mortgage Modification?

If you are a homeowner having trouble fulfilling your mortgage contract, your lender or mortgage servicer may ask you to fill out a loss mitigation form.

Through this form, lenders and servicers determine if a mortgage loan modification makes sense for you.

In addition, they may ask you to provide bank statements, recent tax returns, and mortgage and property information. If you are self-employed, you may also be required to file profit and loss statements.

Why Might I Not Qualify for Mortgage Modification Programs?

You may not get a mortgage loan modification if you do not provide proof of financial hardship. The same is true if you have a high debt-to-income (DTI) ratio.

What Are The Advantages And Disadvantages Of A Mortgage Loan Modification?

Getting a mortgage loan modification could help you avoid foreclosure and keep your home even if you can't fulfill the contract or have trouble making your monthly payment. However, it can also cause your debt to increase considerably.