If an inability to keep up with your mortgage payments leaves you facing potential foreclosure, consider asking your lender to modify your home loan. Through private bank programs or the federal government's Home Affordable Modification Program, your lender can alter your existing mortgage to reduce your payments and help you keep your home.
The loan modification process isn't complete just because your lender approved your application for modification. Your bank may also request that you undergo a trial modification period. This trial period demonstrates to your lender that you're capable of making the new mortgage payment. If you received your loan modification through the government's HAMP program, this trial period is a requirement. The trial modification period generally lasts 90 days. If you miss payments during the trial period, your lender has the right to withdraw its previous approval of your modification application.
Permanent Loan Modification
If you make each of your mortgage payments on time during the trial period, your lender will send you a permanent loan modification agreement. You must sign and return the document to your lender. If you don't, your lender will cancel the loan modification. You must also provide your lender with any other last-minute documents it needs to permanently modify your loan, such as proof of homeowners insurance. After the lender receives the necessary documentation and you return the loan modification agreement, your trial modification becomes permanent.
Lower Mortgage Payments
After the loan modification is complete, your mortgage payment will decrease permanently. The amount you'll have to pay depends on the type of changes your lender makes to your existing mortgage loan. For example, your lender may reduce your payments by lowering your interest rate or extending the duration of your loan. If you obtained a mortgage modification through HAMP, your new payment will not exceed 31 percent of your gross income for the month. The federal government provides a tool that allows you to determine how much your payment should decrease at makinghomeaffordable.gov.
Some lenders will refuse to process your loan modification application until your mortgage is 90 days late or more. Although missing several mortgage payments may be necessary to obtain the modification you need, the credit damage from defaulting on your mortgage loan continues to haunt your credit report long after your modification becomes permanent. According to The Fair Credit Reporting Act, missed payments remain on your credit report for seven years.
The good news is that your new, reduced loan payments make your mortgage less financially taxing and frees up income you can use to pay down other debts. Provided you keep your debts low and continue to pay your creditors in a timely manner, your credit scores will improve over time.
- Bankrate.com: Want to Modify Mortgage? Get a Trial Run
- The Law Offices of Michael Gaddis: Loan Modification Trial Period Plan
- Making Home Affordable: Home Affordable Modification Program (p.9)
- Experian: Effect of Mortgage Loan Modification on Credit Scores
- Federal Trade Commission: The Fair Credit Reporting Act (Section 605/p.22)
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.