What Circumstances Justify a Mortgage Modification?

Whether due to job loss or plummeting home values, homeowners across the United States sometimes struggle to make their mortgage payments each month. To prevent a greater influx of home foreclosures, many lenders agree to modify the mortgages of homeowners and receive incentives to do so from the federal government, through programs such as the Homeowner Affordability and Stability Plan. Certain requirements must be met before many lenders agree to modify a homeowner's current mortgage obligations.

Definition

A mortgage modification, according to the U.S. Department of Housing and Urban Development, is a permanent change in one or more of the terms of a homeowner's loan. The loan is then reinstated according to the new terms, and an affordable payment schedule is determined. A modification is different from a mortgage refinance, when an entirely new loan is created from scratch and which may require extensive credit checks, income verification and other documentation. Financial records may also be required for modifications proving hardship or inability to pay the current mortgage amount.

Lender Requirements

Before lenders agree to modify a mortgage, they may request information or perform certain tasks. According to Macon Phillips' 2009 article "Help for Homeowners" on The White House Blog, lenders are not obligated to modify the terms of a mortgage for a homeowner at any time. Should they agree and receive compensation from the government, certain rules apply. A lender may include legal or foreclosure fees in the modified principal loan amount but may not include late fees. An interior inspection of the property may be performed by the lender, if requested. No costs should apply to the homeowner for participation in certain federal modification programs, such as the Homeowner Affordability and Stability Plan.

Borrower Requirements

The homeowner, or borrower, must meet certain requirements for most lenders to consider a mortgage modification. According to the U.S. Department of the Treasury and HUD, the home should be the borrower's primary residence, not an investment or vacation property. At the time of publication, the principal balance on the loan should be less than $729,750. After calculating your monthly pretax income, the current mortgage payment should exceed 31 percent of that income. Another requirement may be to demonstrate financial hardship or show proof of current or potential delinquency in payments. To qualify for the Home Affordable Modification Program, prospective borrowers must not have a record of fraud or felony larceny in the past 10 years for a mortgage or real estate transaction.

Current Income and Modified Payment

Before agreeing to modify a mortgage and altering one or more terms, a lender will want to be certain that the homeowner has the current capacity to make the new mortgage payment amount. This may require submitting sufficient documented income to support the modified payment, according to the U.S. Department of the Treasury and HUD. A homeowner with more than one mortgage on his homes may have a more challenging process of modifying his first mortgage, but it is possible if certain requirements are met, says Phillips.

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