Homeowners facing a major financial hardship that could lead to a foreclosure may work with a lender to get a loan modification -- sometimes called a mortgage modification, workout plan or restructuring -- which will change the terms of the mortgage loan so the borrower can afford the payments. To do this, the lender may allow the homeowner to refinance the loan, pay a lower interest rate, extend the term of his loan, skip payments and add them to the total loan amount or roll past-due payments into the total loan amount.
In 2009, the government created the Home Affordable Modification Program (HAMP), which is part of the government’s Making Home Affordable Program designed to provide relief for troubled homeowners. HAMP helps troubled homeowners by reducing their mortgage payments so that these payments are 31 percent of their pre-tax monthly income. You can use this calculator to estimate how much your mortgage payments might be reduced under this program. Not all lenders participate in HAMP, but you may be able to work out a loan modification with them nonetheless.
Even lenders who don’t participate in HAMP (mortgage companies with loans owned by Fannie Mae and Freddie Mac must participate, and other lenders have the option to participate) may offer loan modifications, though their criteria for who qualifies will vary. To qualify for HAMP, you must:
- Have gotten your mortgage on or before Jan. 1, 2009.Owe a maximum of $729,750 on your primary residence or single-unit rental property or up to $934,200 on a two-unit rental property (the government sets higher limits for rental properties with more units).
- Have enough documented income that you could pay your mortgage if it was modified.
- Have a financial hardship and thus are delinquent or in danger of becoming delinquent on your mortgage payments. Typically homeowners must show that they are facing “serious” financial hardship such as a loss in income, illness or a divorce that puts them at risk of defaulting on their mortgage. They must prove this hardship with documentation and sign an affidavit to that effect.
- For a full list of eligibility criteria, click here.
Homeowners will likely need to provide the following documents to lenders to be considered for a loan modification: income documentation such as recent pay stubs; tax returns; a list of assets and their estimated values; credit card and loan statements; and a letter outlining the financial hardship they face. Once they have gathered that information, borrowers should call their mortgage servicer -- you can find the number on your monthly bill -- and ask for a loan modification. You do not need to be late on payments to qualify for a loan modification; you just have to show that you’re likely to default on payments if action is not taken by the lender. Consider hiring a lawyer to help you through the process and/or calling your local HUD-approved counseling agency.
Those participating in HAMP probably won’t see a dip in their credit score, as the government has set up requirements that lenders report HAMP in such a way that it doesn't currently harm your credit score. However, there is no guarantee that a loan modification in general won’t impact your credit score.
If you don’t qualify for a loan modification, but can’t make your mortgage payments, you have other options to avoid foreclosure. These include:
- Short selling the home, whereby you and the bank negotiate a deal allowing you to sell your home for less than you currently owe the bank.
- Giving the home back to the lender via a “deed-in-lieu of foreclosure.”
- Getting a forbearance, whereby the lender reduces or suspends your loan payments (usually for up to 90 days).
- Finding a tenant who will rent your home and using that money to repay the lender.
Call your local HUD-approved counseling agency to talk through your options and look into the Home Affordable Foreclosure Alternatives program, which helps homeowners who decide to do a short sale or deed-in-lieu of foreclosure.