Many people struggle to pay their mortgages. This fact sheet provides basic information about mortgage modifications and other potential relief for homeowners.
Mortgage Modifications
What is a mortgage modification?
Many homeowners seek mortgage modifications because they are having difficulty making their mortgage payments. Modifications can take the form of interest rate reductions, extension of the amortization period (i.e., the length of time it takes to pay off a mortgage), principal forbearance (i.e., adding part of the amount owed to the end of the mortgage), capitalizing the loan (i.e., adding all delinquencies to the back-end of the loan), and, in some cases, principal reduction. Typically, a homeowner’s new mortgage payment is tied to a percentage of his or her gross income, often 31 percent.
How do I request a modification?
Many mortgage servicers offer in-house modifications. Eligibility and application processes will vary by mortgage servicers, so borrowers should contact their mortgage servicer to determine any assistance it can provide. If a borrower has any trouble during the process, the borrower may contact the Minnesota Attorney General’s Office.
What is a trial modification?
A trial modification usually lasts three months, but it can sometimes take longer for a mortgage servicer to evaluate a borrower for a permanent modification. During the trial period, the borrower will make reduced payments to the mortgage servicer, and at the conclusion of the trial period, the borrower will then be reviewed for a permanent modification. Be aware that there are negative credit reporting consequences during the trial period because the borrower is paying less than the full mortgage payment. And, because escrow accounts are mandatory for modified mortgages, a borrower’s payment may increase substantially due to taxes and insurance.
What else do I need to know about modifications?
Mortgage servicers must give you a reasonable amount of time to assemble the required documents for a modification review. Once your servicer receives a complete application, it must review your mortgage for all available relief options before pursuing a foreclosure sale. As mentioned above, there are credit reporting consequences during the trial period. If a borrower is not approved for a permanent modification, the borrower’s credit report generally will not be corrected and his or her credit score may be lowered. In addition, the borrower may be charged late fees because the borrower is paying less than the full payment during the trial period, and if the bank continues with the foreclosure process, the borrower may continue to accrue foreclosure fees. For the five banks that are subject to the national mortgage settlement, however, there are restrictions on their ability to commence or continue with the foreclosure process in some cases, so affected borrowers should ask the bank if the borrower will continue to accrue additional fees or costs.
What if I don’t qualify for a modification?
There are still options. Borrowers should ask their mortgage servicer if they’re eligible for forbearance (i.e., the mortgage servicer allows the borrower to pay less than the full mortgage amount for a period of time and upon conclusion a lump sum payment of the remaining delinquency is due) or a repayment plan (i.e., the borrower pays an increased amount for several months to bring the loan current). Keep in mind that a forbearance plan does not eliminate the debt. Instead, the borrower will owe the forbearance amount at a later date (possibly with interest).
Steer Clear of Mortgage Modification Scams
Be wary of people that offer assistance with a modification for a fee. Borrowers can always work with their bank on their own for free, and help is available for free from HUD-approved non-profit organizations. If a borrower encounters difficulty dealing with a mortgage servicer, the borrower can always contact the Minnesota Attorney General’s Office, too. In addition, some fraudsters have called homeowners pretending to be the homeowner’s mortgage servicer and asking for private financial information. Do not provide private financial information to people—call the bank at its known phone number to be sure you’re talking to a bank representative!
Refinancing Your Loan
Interest rates are historically low right now so you may be able to refinance your mortgage. Refinancing your mortgage means getting a new mortgage to replace the one you have. Contact your lender to see if it will refinance your mortgage. You may also try refinancing through another lender or contact a U.S. Department of Housing and Urban Development approved nonprofit housing counselor for additional assistance.
Some lenders won’t let homeowners—including those who are current on their mortgages—refinance to take advantage of these low market rates because the homeowners are “underwater” on their home mortgages (e.g., owe more on their mortgages than their homes are worth). If this applies, a homeowner may wish to see if he or she is eligible for the Home Affordable Refinance Program (HARP), a federal refinancing program available to borrowers whose mortgages are owned or guaranteed by Freddie Mac or Fannie Mae.
Steer Clear of Refinancing Scams
Some homeowners become the target of fraudulent refinancing offers. Such fraudulent refinancing offers may begin with a call from an “underwriter,” who may pretend the call is from the homeowner’s current mortgage lender and make a refinance offer that is hard to pass up (whether due to low interest rate, no closing costs, guaranteed approval, or the like). If it sounds too good to be true, it probably is!
Short Sales
Millions of Americans are “underwater” on their home mortgages, meaning they owe more on their mortgages than their homes are worth. A short sale is when a bank allows a homeowner to sell the home for less than the principal balance of the mortgage. With short sales, ask the bank if it will still hold the seller liable for the deficiency (i.e., the difference between the principal amount owed on the mortgage and the selling price). If the seller has a second mortgage, the seller may be liable to the owner of the second mortgage debt for any deficiency as well. Keep in mind that banks have been known to drag their feet and take months to evaluate short sale requests. There may be income tax consequences to a short sale, so borrowers may want to consult with a tax advisor.
Deed-in-Lieu-of-Foreclosure
A Deed-in-Lieu-of-Foreclosure is when a homeowner gives the home back to the bank instead of going through a foreclosure. In return, the bank releases the homeowner from any remaining debt, late fees, and interest owed on the mortgage. This can benefit homeowners who cannot afford their mortgage but are unable to obtain a modification or restructure. A Deed-in-Lieu may have less impact on your credit than a foreclosure. As with a short sale, a homeowner considering a Deed-in-Lieu should ask the bank if it will hold the homeowner liable for the difference between the appraised value and the amount owed on the mortgage. Because a Deed-in-Lieu can also have tax implications, you should consult with a tax professional if you believe a Deed-in-Lieu may be right for you.
Finding a Reputable Foreclosure Counselor
Because there are fraudsters that prey on those who have difficulty making their mortgage payments— whether by charging fees for “help” negotiating a modification or otherwise—borrowers should use a HUD-approved housing counseling agency. Borrowers can search for HUD-approved counseling agencies using the information below:
