Benefits and Drawbacks of Mortgage Loan Modification

Mortgage loan modification is a way to avoid foreclosure. If you're falling behind on your mortgage payments, it's definitely something to consider. The best time to consider this type of modification is actually before you're late on one single payment. If you anticipate problems paying your mortgage, now might be the time to talk to your lender about loan modification.

If you or your spouse has lost a job, for instance, you know your income will soon be drastically reduced. This is a scenario where you may not have been late on a payment yet but you anticipate problems. And this is a situation where a mortgage loan modification could be right for you. You need to contact your bank or your lender and explain to them your changed financial situation. You'll have to fill out paperwork and prove your finances have dropped from when you originally took out the mortgage.

You're not guaranteed to qualify for the modification, but you can't get in unless you go through the application process. The bank or lender will either grant the modification, deny it, or possibly offer you a different option like refinancing.

A mortgage loan modification doesn't require refinancing. It's simply the act of changing the terms of the mortgage for a period of time which usually runs about five years. After the five-year period is over, the mortgage terms revert to their original numbers. Most lenders consider the first three months after a modification to be probation. As long as you make your newly reduced payments on time for the probation period, the modification will go through. If you're late on one of those three payments, the modification can be tossed out.



The benefits of a mortgage loan modification are clear. You get a reduced payment that's more in line with your current income, and possibly a reduced interest rate, but this depends on your lender in your particular situation. A reduced payment will help you make your payments and keep your home from being foreclosed on. This is a huge benefit for anyone who's risking the loss of their home.

The drawbacks of mortgage loan modification can be far-reaching, however. The modification will show on your credit report and will affect your credit score. It can drop your FICO score quite a bit at first, but the score will recover over time. If you anticipate needing credit for anything else in the near future, however, that dropped score will affect your ability to get credit. You may still qualify for credit, but your interest rates will be higher because of your lower score. And in some cases the score may be lowered enough that creditors turn you down.

There is also a chance that your current credit card rates will rise because of the lower score. Even if you're not late on a payment with them, the mortgage loan modification showing on your credit report can cause them to raise your interest rates and in some cases can greatly offset the money you save with a lower mortgage payment.

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About the Author

Leonard Carson

Leonard Carson has assisted and advised several clients on the ins and outs of mortgage modification. After practicing as a financial... (show bio)