Loan modification: Defined and explained

Buying a home is a time of good feelings. When you’re picking out furniture and assessing paint colors, you expect everything to go well for the foreseeable future. But life can bring its fair share of challenges.

If a change in your circumstances makes your house payment unmanageable, a loan modification could help you get current and remain in your home. If you’re considering this, here’s what you need to know before moving forward.

What is a loan modification?

A loan modification is a change in the terms of your loan. Typically, missed mortgage payments are added to your loan balance. Your rate may change, and your term may be extended as relief if you’re in default. It sounds similar, but this differs from refinancing your loan, which is paying off your existing loan and getting a new one.

A loan modification is intended to help you stay in your home if you’re struggling with your monthly mortgage payment. You have to show a financial hardship. This is just one of several relief options your mortgage servicer may try to qualify you for.

What to know about getting a loan modification

Before moving forward with a loan modification, it’s important to understand the potential credit implications, the process of the modification itself, and what to expect during the qualification process.

Credit impact

Unlike a refinance, there’s generally a negative credit impact that comes with a loan modification because you haven’t been able to make your payments. The exception to this tends to be loan modification and other forms of mortgage relief in the wake of a natural disaster when Rocket Mortgage^® doesn’t report negative credit information.

The impact of a loan modification on your credit score is going to depend on what your score was prior to the modification. The higher your existing score, the more of a drop you can expect to see. On the other hand, if you’ve already had several late payments or other negative credit events, the slide may be more gradual.

The process

If you’re approved for a modification, know that this is a two-phase process. Before being approved for your modification officially, your servicer will approve a trial modification. If you’re able to keep up with your new payments during a 3-month trial period, you’ll be approved for a final modification.

If you miss payments during the trial, you may be disqualified from using a modification. Your servicer may talk to you about taking steps to gracefully exit the home.

What to expect from your mortgage servicer

When you work with your servicer, you’re going to need to provide documentation of your hardship including an explanation of what’s going on, along with financial documentation on your income and assets. From there, your servicer will look for the best option to help you, which may or may not be a mortgage modification.

Rocket Mortgage clients can reach out by signing into their Rocket Account and navigating to the mortgage tab. From there, you can select Help > Payment assistance.

If you qualify for a modification, there’s additional documentation that needs to be signed and recorded to update the terms of your loan. As part of this process, your servicer has to ask questions on several topics:

• Changes in marital or divorce status since receiving your loan
• Ownership changes
• Whether you have power of attorney status
• You’ll need to provide the following documents, if applicable:
• Any applicable divorce decree
• If an original client on the loan has died, you need to provide the death certificate
• Any power of attorney documentation you may have
• At closing, be sure to bring the following:
• Government-issued ID or driver’s license
• Your contact information

Other liens or judgments on the title outside of those that existed prior to the mortgage may make your home ineligible for modification.

The Department of Housing and Urban Development (HUD) offers housing counseling services that may help you with budgeting or ideas on adjusting other bills. You can search their online directory or call (800) 569-4287.

While your modification is ongoing, you may still receive documentation regarding your delinquency status and your account with the servicer may be restricted.

If you have an escrow account, for taxes and insurance, your escrow analysis continues as scheduled. It won’t affect your modification payment. Once your modification is done and the loan is current, a final escrow analysis is conducted.

Alternatives to a loan modification

In loan modification is a good option if there’s a way for you to stay in your home. If that’s not possible or impractical for your situation, there are a few alternatives you can use to gracefully exit your home.

• Sell your home: if you can sell your home at its current market value and pay off your mortgage, this is the best possible option for moving on. There’s no negative credit impact. You can take whatever profits are left over and use them to find your next place.
• Short sale: Your servicer may approve a short sale if values have dropped in your market and it’s not possible to sell your home for an amount that would pay off your mortgage. If approved, the servicer has final say over all offers. In some states, lenders are able to pursue the difference between the sale price and what you owe in a deficiency judgment. Ask your servicer their policy on this. Servicers may also be able to give you relocation assistance in exchange for keeping the home in sellable condition.
• Deed-in-lieu of foreclosure: If you have a qualifying hardship, a servicer can also approve a deed-in-lieu of foreclosure. In this process, you give up the property without having to worry about sticking around for the sale. The same guidelines regarding deficiency judgments and relocation assistance apply, so maintain clear communication with your servicer.

The bottom line: Loan modification is one avenue for mortgage relief

A loan modification is a change to the terms of your loan to add back in missed payments. It may involve a change in your interest rate, loan term, or both. Your credit score will often be lower as a result of taking a modification. The exception is after a declared natural disaster.

If you’re struggling with the payment for your home, your servicer may be able to offer you a loan modification or qualify you for other relief options. If you’re a Rocket Mortgage client, you can get in touch with us by signing into your Rocket Account and locating Help  > Payment assistance under the Mortgage tab.