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If you're facing financial hardship and struggling to make your monthly mortgage payment, a mortgage modification may make your home loan more affordable and help you avoid foreclosure.
Loan modifications date as far back as the 1930s, when they helped stabilize the housing market during the Great Depression by making mortgages more manageable for homeowners.
You may receive some of the same benefits today by working with your lenders to get a loan modification to regain control of your mortgage payments and prevent foreclosure. One well-known modification is the Fannie Mae and Freddie Mac Flex Modification program, which allows you to modify your mortgage if you face financial hardship. Here's how it works.
What Is the Flex Modification Program?
The Flex Modification program is offered jointly by Fannie Mae and Freddie Mac, two government-sponsored agencies that purchase and guarantee loans that meet specific standards. The program replaces the Home Affordable Modification Program (HAMP) and the agencies' previous "Standard" and "Streamlined" modification programs.
The Flex Modification program generally aims to reduce your monthly mortgage obligation by roughly 20% through various means, such as:
- Lowering your interest rate: Even a rate reduction of 1 percentage point could save you hundreds of dollars on your monthly mortgage payment.
- Adding overdue payments to your principal balance: Any past-due amounts and penalties may be added to your principal balance, so you don't have to pay them right away to get caught up.
- Extending your loan term: Adding years to your loan term, up to 40 years, can lower your monthly payment significantly. Although you'll pay more interest with a longer loan term, it may make sense if it helps you avoid foreclosure.
- Forbearance for a portion of the mortgage balance: The lender may set aside some of the mortgage debt and omit it when calculating your new payment. You'll need to pay this separate part when you refinance, sell the house or reach the end of the loan term.
If you qualify, many lenders are willing to modify your loan because it often requires less time and money than foreclosure.
Who Qualifies for the Flex Modification Program?
To qualify for the Flex Modification program, you must meet several criteria, such as:
- You must be facing financial hardship, such as a divorce, the death of a borrower, job loss or income reduction.
- You must have verifiable income that shows sufficient income to make a monthly payment.
- You must be at least 60 days past due on your monthly mortgage payments, or your lender must determine your hardship makes it unlikely for you to continue making timely payments.
- Your mortgage must be at least 12 months old.
- Your home must be owned or guaranteed by either Fannie Mae or Freddie Mac. If you're not sure who owns your mortgage, you can ask your loan servicer or verify with Fannie Mae or Freddie Mac online.
- Your property must be a primary residence, second home or investment property.
Even if you don't meet all of the eligibility requirements, it's crucial to proactively contact your lender to determine your options before it's too late. For example, if you have a government-backed loan, such as an FHA or VA loan, instead of a conventional one, you may instead qualify for a modification program from the agency that backs your loan.
How to Apply for the Flex Modification Program
Once you've verified Fannie Mae or Freddie Mac back your loan, contact your loan servicer to discuss their process and learn what documents you must provide. Also, ask your servicer what other loan assistance programs are available to you.
Submit Your Application for Flex Modification
If you're facing foreclosure, you must submit your application at least 37 days before the planned foreclosure sale. Federal law mandates a delay in foreclosure while your application is under review.
If you're current on your loan or less than 90 days delinquent, you must complete a Borrower Response Package (BRP). Borrowers who are delinquent for more than 90 days aren't required to submit a BRP.
Your loan servicer may offer you a Flex Modification even if you don't apply for one. Fannie Mae and Freddie Mac require their servicers to review you for a loan modification if you're 90 to 105 days late with your payments.
Complete a Trial Period
To qualify for a Fannie Mae and Freddie Mac Flex Modification, you must complete a three- or four-month trial period to demonstrate you can make your monthly payments on time. If you do, you could receive a permanent loan modification with a more affordable payment. Additionally, your lender may waive your past late charges and other fees.
What to Do if You Don't Qualify for Flex Modification
If you're struggling to afford your mortgage payments but don't qualify for flex modification, you may still have options, such as:
- Consider mortgage forbearance. If eligible, a forbearance can reduce or suspend your monthly home loan payments for up to 12 months to get you through a financial hardship.
- Refinance your home. If you're current on your mortgage, your credit may be strong enough—typically 620 or higher—to qualify for a new home loan. Ideally, you'll have at least 20% equity in your home to avoid paying for mortgage insurance, and your new loan should carry a significantly lower interest rate than your current loan to lower your payment.
- Boost your income. If you're not in foreclosure, you may have time to catch up on payments by increasing your income. Start with your employer by volunteering for overtime or asking for a wage increase if your salary falls short of the market rate. You can also look to find a higher-paying job elsewhere.
- Reevaluate your budget. You can better manage your mortgage payments by reviewing your budget and identifying areas to cut back on expenses. By tracking your spending, reducing debt and prioritizing mortgage payments, you can allocate more funds to your mortgage. It's also wise to build and maintain an emergency fund to cover unexpected expenses that would otherwise throw a wrench in your finances.
Keep an Eye on Your Finances and Your Credit
If you're approved for a loan modification, make sure you understand the impact it will have on your monthly payments and the total amount you'll owe immediately and in the long term.
One of the most empowering ways to get through tough times is to have a clear picture of your finances and make intelligent decisions that help you get back on your feet. Remember to keep track of your credit to help keep it in good standing. Consider free credit monitoring from Experian, which can show you what factors influence your credit and how you can improve it even when your budget is under strain.