A Loan Modification Could Help

 

What is a loan modification

Loans can be modified in various ways. For instance, the lender may lower the interest rate; extend the length of the loan; or allow a homeowner to skip payments until he’s found a new job, adding those missed payments to the principal to pay later.

The terms all depend on the homeowner’s specific circumstances, but the goal is ultimately the same: to provide financial relief for homeowners who are struggling to pay their mortgage.

To get a loan modification, you’ll need to apply through your current mortgage lender, and you can start by filling out a Request for Mortgage Assistance form. Your lender will probably require the following documents:

  • Your monthly mortgage statement
  • Information about any other mortgages on your home
  • For salaried employees or hourly wage earners, two recent pay stubs that reflect year-to-date income
  • For self-employed homeowners, your most recent signed and dated quarterly or year-to-date profit and loss statement
  • Documentation of additional income received from other sources (tips, commissions, bonuses, housing allowances, overtime, etc.)
  • Documentation of any benefits received (Social Security, disability, death benefits, pension, public assistance, or adoption assistance, etc.)
  • Two most recent bank statements
  • A utility bill showing your name and property address
  • Your two most recent federal tax returns
  • A letter describing the circumstances causing your hardship

Will a mortgage modification hurt your credit score?

If you choose to go through your lender for a mortgage modification, be prepared. Some lenders may report a modification as a debt settlement, which will have an adverse impact on your credit score.

If your credit score is already on the low end and you’re already behind on mortgage payments, the impact might be minimal. However, if you’ve maintained a high credit score, a ding from a reported debt settlement might have a larger impact on your credit score.

To make sure your credit score is protected, ask your lender how it plans to report the modification to credit bureaus before you finalize the deal.

Once your loan modification is in place, you can use it to improve your credit score. Your lender will report your payment history to the credit bureaus, and if you pay on time each month, your credit score will gradually increase as you build up a solid payment history.

On the flip side, if you fall behind on your payments under modification, the lender will report this as well. Late payments can take a bite out of your credit score—especially if they’re a recurring issue.

Where to go for loan modification guidance

If this sounds complicated, don’t panic. There are professionals who will help walk you through the loan modification process—you may have heard or seen ads for such services. But use caution when selecting one.

According to Ulloa, it’s a red flag if the firm guarantees a modification and asks for payment before it assesses your eligibility.

One trustworthy place to get more guidance? The counseling experts at the HUD-approved housing counseling agency. You can reach them by calling 888-995-HOPE (4673) or visiting HUD.gov.

Another good place to go? The government’s Home Affordable Modification Program, part of the government’s Making Home Affordable Program, encourages lenders to offer more loan modifications by giving them grants, subsidies, and other financial incentives.

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