What Is a Loan Modification?

A couple reviews financial paperwork with an advisor.

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A loan modification is a change to your current home loan, whether that’s changing the length of repayment, interest rate, or other terms.

Key Takeaways

  • If you’re struggling to pay your mortgage, a loan modification changes your existing loan terms to something more manageable.
  • You might be able to change your interest rate, extend your repayment terms, or change other loan terms to make your mortgage payments more affordable.
  • To qualify for a loan modification, you’ll need to demonstrate financial hardship. Loan modifications can take months to complete.
  • Alternatives to loan modifications include forbearance and refinancing.

How Do Loan Modifications Work?

Loan modifications are available to borrowers who are facing extreme financial hardship. Many lenders would rather work with you on a compromise than go through with a foreclosure.

How To Get a Loan Modification

Start with a phone call or online inquiry to the lender. Be honest and explain why it’s hard for you to make your mortgage payments right now. Then, let your lender know about your proposed adjustment to the mortgage.

Lenders often require a loss mitigation application and details about your finances to weigh your request. Some will require that you miss a mortgage payment, often by up to 60 days. Be ready to provide:

  • Income: This is how much you earn and where it comes from.
  • Expenses: This is how much you spend each month, and how much goes toward different categories, such as housing, food, and transportation.
  • Documents: You'll often need to provide proof of your financial situation, including pay stubs, bank statements, tax returns, and loan statements.
  • A hardship letter: Explain what happened that affects your ability to make your current mortgage payments, and how you hope rectify the situation or how you have done so. Your other documentation should support this information.
  • IRS Form 4506-T: This form allows the lender to access your tax information from the Internal Revenue Service (IRS) if you can't or don't supply it yourself.

The application process can take hours. You’ll have to fill out forms, gather information, and submit everything in the format your lender requires.

Within 30 days of receiving a completed application, the lender generally must respond to your application with written notice of its offer or denial, along with the specific terms of the mortgage modification. Keep in contact with your lender during this time in case questions arise. It’s usually best to do what your bank tells you to do during this time, if at all possible. For instance, you might be instructed to continue making payments. Doing so could help you qualify for the mortgage modification. In fact, this is a requirement for approval with some lenders.

Once you receive an offer for a loan modification, you'll have to accept or deny it within the prescribed timeframe to see the changes in your loan.


Keep in mind that a loan modification and forbearance are not the same. Forbearance is temporarily pausing repayment for a fixed amount of time on your current loan terms. It’s a short-term adjustment but doesn’t impact the overall loan. After forbearance ends, you will be expected to make up the missed payments along with any accrued interest. A loan modification makes permanent changes to the current loan.

Pros and Cons of Loan Modifications

  • Reduced interest rate

  • Change in loan type

  • Longer repayment period

  • Short-term hardship

  • Increased interest expense

Pros Explained

  • Reduced interest rate: A loan modification could lower your interest rate, which lowers your monthly payment and could reduce the amount of interest you pay over the life of the loan.
  • Change in loan type: You could move from an adjustable-rate mortgage to a fixed-rate mortgage. This means your interest rate could change.
  • Longer repayment period: Typical loan terms usually max out at 30 years. However, you could extend your repayment term, which lowers your monthly payment to something more affordable.

Cons Explained

  • Short-term hardship: Since loan modifications can take months to sort out, you could fall further behind on your mortgage with each month that passes. You may also incur costs, such as for an appraiser, as you work through the process.
  • Increased interest expense: If you extend your loan terms, you could end up paying more in interest over the life of the loan.

Loan Modifications vs. Refinancing

Refinancing and loan modification might sound similar, but they’re not the same thing.

Loan Modification Refinance
Changes your current loan A new loan replaces your old loan
Could lower your interest rate, monthly payment, or both Could lower your interest rate, monthly payment, or both
Work with your existing lender Work with a new lender or your existing one
Must show financial hardship, possibly falling behind on loan payments for several months Can refinance any time, but you must pay closing costs again
Cannot cash out Can cash out
No prepayment penalty Prepayment penalty
Cannot extend the loan term Can extend the loan term

Alternatives to a Loan Modification

Refinance the Loan

Modification is typically an option for borrowers who are unable to refinance, but it might be possible to replace your existing loan with a brand new one. This is a particularly good option if you want to get cash out from the equity that has built up in your home.

A new loan might have a lower interest rate and a longer repayment period, so the result would be the same—you’d have lower payments going forward. You'll probably have to pay application and origination fees on the new loan. You also need decent credit.

Consider Bankruptcy

If you can't get a mortgage modification or refinance the loan, you might have one other option for keeping the property. You can file for Chapter 13 bankruptcy. This isn't the same as a Chapter 7 bankruptcy where the court takes control of your non-exempt assets, if any, and liquidates them to pay your creditors. Chapter 13 allows you to enter into a court-approved payment plan to pay off your debts, usually for three to five years.

You can include your mortgage arrears in this if you qualify. This lets you catch up, get back on your feet, and even keep your home. You must typically keep making your current mortgage payments in the interim. If this seems impossible, look into whether you can consolidate your other debts into the payment plan as well. You must have enough income to qualify.

Frequently Asked Questions (FAQs)

Can you refinance after a loan modification?

You can refinance your mortgage loan after a loan modification, although your lender may require you to wait a period of time before doing so. More importantly, the financial circumstances that caused you to seek a loan modification may have hurt your credit score, or your debt-to-income ratio or other factors such that you may be unlikely to qualify for a refinance.

How long does a loan modification last?

A loan modification is a permanent change to your loan terms and will last as long as you own the home or retire the loan by paying it off. The application process can be lengthy, and includes a "trial period" during which you must make on time payments to demonstrate that the new terms are affordable for you.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Fannie Mae. "Know Your Options: Modification."

  2. Internal Revenue Service. "About Form 4506-T, Request for Transcript of Tax Return."

  3. Consumer Financial Protection Bureau. "Help For Struggling Borrowers: A Guide to the Mortgage Servicing Rules Effective on January 10, 2014," Page 36.

  4. Experian. "Bankruptcy: Chapter 7 vs. Chapter 13."

  5. Experian. "How Soon Can I Refinance My House?"

  6. Consumer Financial Protection Bureau. "What Is a Mortgage Loan Modification?"

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