Can a Home Loan Be Modified Without Missing a Payment?

••• Brand X Pictures/Brand X Pictures/Getty Images

Many mortgage lenders modify loans when the borrower can prove that default is just around the corner. Unless you lose your job suddenly or encounter an unexpected major expense that prevents you from meeting your mortgage obligation, you typically can foresee when trouble is on the way. Lenders often contact borrowers who send payments in past their due date and remind them via monthly statements to contact the lender if they fear they may fall behind.

The Imminent Default Standard

Lenders can modify loans for borrowers facing imminent default -- when default is reasonably foreseeable. Fannie Mae, one of the two agencies that sets guidelines for a majority of conventional mortgages, set a standard for the circumstances that constitute imminent default. The loan servicer or lender must evaluate the borrower's financial condition and implement a three-step process for determining whether default is imminent. It involves reviewing borrower cash reserves, running the borrower's financial analysis through an automated risk-assessment tool, and reviewing the borrower's proof of financial hardship.

Making Home Affordable Before Default

The federal government's foreclosure prevention initiative, Making Home Affordable, offers the Home Affordable Modification Program, or HAMP. The HAMP guidelines streamline the modification application and approval process among more than 100 participating lenders and loan servicing companies. You may qualify for HAMP if you have a financial hardship and are "in danger of falling behind on your mortgage payments," according to the Making Home Affordable website. You must also have obtained your loan on or before Jan. 1, 2009, owe no more than $729,750 for a one-unit property, and earn enough money to make the modified payment. You can't modify a loan for a property that's not owner-occupied without missing a payment.

Another Reason to Avoid Default

Although you may qualify for a modification without missing payments, there are other reasons to stave off default. When you can afford to make the monthly payment but don't, which is known as deliberate or strategic default, your credit score suffers. Current and future creditors may lower your credit lines or reject you for financing altogether. In the event you don't qualify for a modification -- for example, you can't afford the reduced payment -- recent late payments disqualify you from a refinance, Bankrate says.

When All Else Fails

Federally backed loans, such as those backed by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture, also participate in HAMP. FHA-HAMP, VA-HAMP and USDA-HAMP allow you to modify without missing a payment if you meet all other requirements set by the individual government entities. Most lenders try to approve you under theHAMP due to monetary incentives they receive for participating in the program. In the event you don't qualify under HAMP, your lender may offer you a modification under its own in-house program. Depending on the lender, the in-house modification can also help borrowers who have yet to miss a payment, but face imminent default and demonstrate financial hardship.