You may want to change the terms of your mortgage because you cannot afford your mortgage payments or some other reason. A mortgage modification, also known as a debt rescheduling, can enable you to change the terms of your mortgage. Examples of terms that can be changed with a mortgage modification include:
• Payments – Reduce monthly payment amounts.
• Term – Extend the number of years to pay off the loan.
• Interest rate – If interest rates are lower than when you locked in your interest rate, you might be able to modify your mortgage to obtain a lower interest rate.
• Fixed interest rate – Fix the interest rate if it is a variable interest rate.
• Principal balance of loan – Reduce the principal balance of a loan.
• Principal forbearance – Sets part of the principal balance aside to be paid back later, which can help reduce monthly payments. These modifications are rare and only obtainable as a last resort if it will help avoid foreclosure. Once you complete the repayment plan, your lender might be willing to settle some of the principal balance.
Examples of situations where you might want to contact your lender about a mortgage modification include:
• You are in danger of falling behind on mortgage payments.
• You already fell behind on mortgage payments.
• You are not eligible to refinance.
• You are facing a long-term financial hardship that impacts your ability to repay your mortgage.
• You need a principal reduction to help lower your monthly mortgage payments.
To modify your mortgage, you will need to apply for a mortgage modification through your lender. Every lender has their own standards for loan modifications. Some examples of the documentation you will likely need to provide your lender to apply for a mortgage modification include:
• Proof of income – Your lender will want proof that you cannot afford your current mortgage payments.
• Bank statements – Your lender may want to see your current assets.
• Tax returns – Most recent tax returns will likely be requested.
• Hardship letter – The hardship letter is where you tell your lender why you can no longer make your current mortgage payments. For instance, perhaps you lost your job, or you cannot work due to a disability or illness.
The downside of a mortgage modification is that it could negatively impact your credit score. If you are current on mortgage payments, you might be better off refinancing if you qualify.