How to Modify Your Fannie Mae Home Loan

In addition to offering home loans and refinancing options, Fannie Mae (FNMA) also has loan modification options for eligible homeowners. A home loan modification is a great option for current homeowners who want to restructure their loan terms for one reason or another. In many cases, homeowners simply want to reduce their monthly payments. However, modifying a loan is not a simple process, since FNMA sets strict guidelines and eligibility requirements that lenders must follow.

Sending in the mortgage loan modification application is the first step to successfully altering the terms of your original loan. What follows is an in-depth look into the applicant’s current financial status and property. To qualify for a modification, applicants must often show that they have recently gone through a hardship. Financial struggles, namely a decrease in credit score, are also acceptable circumstances to obtain a modification. For an overview of the process to obtain a loan modification, review the sections below.

What is a loan modification?

A Fannie Mae home loan modification is the process of adjusting the terms of a current home loan. In many cases, homeowners submit a modification application because they cannot afford their mortgage payments. This may be due to a recent hardship, such as a loss of employment or a disability.

A mortgage loan modification differs greatly from a refinancing agreement. While the former refers to a adjustment on a current loan, refinancing entails creating an entirely new mortgage agreement. However, both methods can offer reduced interest rates. However, refinancing requires a good credit score and involves stricter eligibility requirements. This is why many homeowners must use the loan modification only after trying other methods. While the loan modification does lengthen the loan term, this is what allows homeowners to improve the financial management of their monthly payments.

Loan Modification Eligibility Requirements

To qualify for a loan modification, applicants must first meet the criteria set by Fannie Mae. When applicants first apply for a modified plan, they must have a lien conventional mortgage and be at least two months behind on mortgage payments. If the lender suspects the borrower will soon default, it may waive that requirement as part of the “imminent default” criteria.

There are two scenarios in which homeowners can qualify for a Fannie Mae flex modification without meeting these requirements: a drop in credit and recent hardship. The first criteria requires that applicants have a FICO score of 620 or less. This must also be accompanied by 40 percent or more debt-to-income ratio or consistent delays in mortgage payments. In terms of hardships, there are several circumstances that Fannie Mae allows lenders to accept in the loan modification process. The first applies if the applicant or a major wage earner in the household loses employment.

For additional circumstances that qualify as a hardship for a home loan modification, download our guide.

There are additional mortgage loan modification requirements pertaining to the loan directly. If a borrower has already received three or more modifications previously, he or she is not eligible for an FNMA loan modification. In addition, borrowers who have actively participated in a trial period plan in the last 12 months cannot apply for another modified loan. Moreover, borrowers must complete at least one year of the loan contract prior to requesting the loan modification.

It is important to note that while Fannie Mae sets strict guidelines on how to proceed to determine a homeowner’s loan modification eligibility, lenders can use their own discretion for special circumstances. If a lender reviews a homeowner’s case that does not meet the above-listed requirements, it may still accept an application.

What is the loan modification application process?

The application process for a Fannie Mae loan modification is extensive. The first step applicants must complete is gathering the proper documentation. During the application process, lenders will request that applicants provide proof of income and employment. Applicants must also provide personal information, such as Social Security Numbers (SSNs) to lenders, as they will need to assess the applicant’s current financial history.

As discussed above, applicants must meet a series of requirements that are different from the regular Fannie Mae eligibility requirements when attempting to qualify for the modified loan. If they have not been behind on payments for at least two months, they must provide proof of hardship or show a recent dip in FICO score below FNMA standards.

The next step in the loan modification process is the review. When a lender receives your documentation, he or she will acknowledge receipt of your information. If any documents are missing, you will receive a notice letter to submit all missing records. Once lenders have the applicant’s full case information, they have up to 30 days to make a decision. During this time, the lender may request a property appraisal to determine the home’s current value. In addition, applicants who are at risk of a home foreclosure may benefit from delay in the proceedings if they meet certain requirements.

Determining New Loan Terms

The Fannie Mae loan modification is a six-step process in which lenders determine what the new terms of the loan will be. In most cases, lenders will start by adding the borrower’s past due balance to the end of the loan. In some cases, lenders may allow principal forbearance. This loan modification allows borrowers to pay their past due mortgage loan amount at the end of the loan period without interest.

The next step in the home loan modification process is lengthening the lifespan of the loan. To create a more affordable payment plan, Fannie Mae requires that lenders extend the loan term to 480 months. While the borrower will have to pay off the loan over a longer stretch, it will provide lower monthly payments.

For a detailed overview of the steps in setting new loan terms, download our guide.

What is Fannie Mae?

The Federal National Mortgage Association (Fannie Mae) provides affordable housing finance options for homebuyers and renters. Fannie Mae does not provide original mortgages. Rather, the organization purchases existing mortgages and guarantees them with government sponsorship. Fannie Mae mortgages have a fixed rate and can have a lifespan as long as 30 years.

Who is eligible for Fannie Mae?

Fannie Mae guarantees multi-family and single-family mortgages and loans. To qualify for either type of loan, an applicant must have an income lower than the local average, and the property he or she wants to buy must be worth less than the federal maximum. Further, applicants must have a credit score above 620. However, the minimum required credit score may change depending on how many properties the applicant plans to purchase.