man on computer working out mortgage loan modification

How the Mortgage Loan Modification Process Works

Have you missed one or more mortgage payments and can’t refinance your mortgage? In that case, you may be eligible for a mortgage loan modification.

While this type of mortgage modification program is normally used as a last resort, after all other refinancing avenues have been exhausted, a modified mortgage loan can help you stay in your home and avoid foreclosure.

What Is a Mortgage Loan Modification: The Loan-Down

A mortgage loan modification changes the terms of your existing mortgage agreement to make your monthly payments more affordable.

This type of loan is designed for homeowners who’ve fallen behind on monthly mortgage payments because of huge financial burdens.

Your lender has to agree to a mortgage modification and write it up in a contract. Make sure everything looks good before signing it – never feel pressured to do anything because of the circumstances.

How a Mortgage Loan Modification Works: The Basics

During the mortgage loan modification process, your lender will work with you to change the terms of your original mortgage contract.

This could include one or more of the following:

  • Lowering the interest rate
  • Extending how long you have to pay the mortgage back
  • Changing from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage

Each of these adjustments could be a big help. Just make sure you understand the financial impacts before you sign on the dotted line.

For example, extending your loan from a 15- to a 30-year mortgage could lower your monthly payment, but you’d end up paying more over time because of interest – even with a lower interest rate. That might sound good, initially, because it helps you hold on to your home, but don’t hesitate to ask your lender about these kinds of considerations.

Does Mortgage Loan Modification Affect Your Credit?: It Depends

In most cases, a mortgage loan modification will negatively impact a homeowner’s credit score. If your mortgage lender reports the modification as a debt restructuring, your score will take a big hit.

No one wants to take a hit on their credit score, but think about it this way, a credit score hit outweighs the consequences of missed payments and foreclosure.

This is one reason why refinancing your mortgage may be a better option if it’s available to you (more on that below).

Here’s something to consider: If you’re fortunate enough to have a lender that doesn’t report your mortgage modification, the change may boost your score, since your monthly payments will be lower. And that’s what we call a win-win.

Ask your lender if your mortgage modification will be reported.

Qualify For a Mortgage Loan Modification: The How

To qualify for a mortgage loan modification, you must be at least one mortgage payment behind, and you must provide evidence of financial hardship, such as an illness or a disability.

Your first step should be to contact your lender. They’ll walk you through their specific process for figuring out if you qualify.

How Much Does a Mortgage Loan Modification Cost?: $$$

Some lenders charge a processing fee for making this type of mortgage adjustment. It’s best to check with your specific lender to determine what types of fees may be included in the loan modification process.

But here’s some good news: There are no closing costs for a mortgage modification.

There are also other options to consider, including refinancing and forbearance.

Refinancing vs. mortgage loan modification

Here are the pros and cons of refinancing your mortgage.


  • Refinancing may get you lower monthly payments
  • No negative impact on your credit score
  • Potentially lowers interest rates


  • May be tougher to qualify for
  • Extends the life of the mortgage
  • You have to pay closing costs
  • Can cost more in interest over the life of the loan

Forbearance vs. mortgage loan modification

Forbearance happens when your lender agrees to pause your mortgage payments (or allows you to make smaller payments) for a limited number of months.


  • Forbearance can help you avoid foreclosure
  • Pauses or reduces mortgage payments
  • Gives you time to get back on your feet


  • Temporary solution
  • Adds missed payments to the end of the loan
  • May lower credit score

Necessary Paperwork: The Documents

To request a mortgage loan modification, you’re required to submit a letter that explains your specific situation to the lender. Go ahead, open a fresh document – and don’t hold back! Lenders want specific details.

The mortgage lender will use the information along with your loan modification application to determine your eligibility.

Your mortgage lender may also ask you to prove your financial status by providing some or all the following documentation:

  • Income/expenses worksheet
  • Financial records
  • Bank statements
  • Tax records
  • Proof of all other types of income

Mortgage Loan Modification Denied: Here’s Why

Not every homeowner who applies for a mortgage modification is approved.

Here is a list of reasons why you might be denied a mortgage modification:

  • Unable to prove financial hardship
  • Incomplete loan application
  • Missing financial documents
  • Own other high-value assets
  • Lender deems you unable to afford modified payments
  • Property has been condemned

If you’ve been denied, don’t worry. You can appeal and plead your case.

There’s reason for hope: In many cases, mortgage lenders benefit from modifying a homeowner’s mortgage payments. It helps them avoid having to deal with a messy foreclosure process.

How Long Does a Mortgage Loan Modification Last?

Most modifications made to home mortgages are permanent. This means that the changes will remain in place throughout the loan, or until you sell your property.

There are certain cases when the mortgage company may only offer a temporary mortgage modification.

Temporary mortgage modifications are specifically designed to provide homeowners with some type of relief until they can get back on their feet. These modified mortgage loans typically remain in place for at least 1 year.

Mortgage Loan Modification: A Last Resort

If you’ve missed one or more mortgage payments and you feel like you’re out of options, a mortgage loan modification may end up being your best bet.

But before you jump into modifying your mortgage, give yourself a chance to check out all your options so that you can decide which one is right for you.

The Short Version

  • A mortgage loan modification is one way to avoid foreclosure
  • You can lower your monthly payments with a mortgage modification
  • Home loan modifications are available with no closing costs
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