If you're struggling to make your mortgage payments, getting a loan modification might be your last chance to save your home from foreclosure. And if Fannie Mae or Freddie Mac owns your loan, you might qualify for a "Flex Modification," a special loan modification program.
With a loan modification, the lender agrees to change the borrower’s loan terms, which lowers the monthly payment to a more affordable amount. Under the Flex Modification program, your monthly payment will decrease by around 20%.
Who—or What—Are Fannie Mae and Freddie Mac?
The Federal National Mortgage Association, known as "Fannie Mae," and the Federal Home Loan Mortgage Corporation, known as "Freddie Mac," are government-sponsored enterprises (GSEs) that own or back many mortgages in the United States.
What Is a GSE?
A borrower typically gets a home loan directly from a bank or mortgage company. The original lender usually won’t hold on to the loan. Lenders usually sell the loans they originate to other banks or investors, like Fannie Mae and Freddie Mac, on the "secondary mortgage market." (Fannie Mae and Freddie Mac don’t make mortgage loans directly; they buy loans on the secondary market.)
After buying loans from banks and mortgage companies, Fannie Mae and Freddie Mac either hold the mortgages in their portfolios or package them into mortgage-backed securities, which they sell to private investors. Fannie Mae and Freddie Mac often guarantee the loans they sell to investors. By guaranteeing a loan, Fannie Mae and Freddie Mac ensure that an investor gets paid on the loan even if the borrower defaults.
Because Fannie Mae and Freddie Mac continually buy mortgages from banks and mortgage companies, lenders have a steady source of cash to keep making loans to new borrowers.
What Is the Fannie Mae/Freddie Mac Flex Modification Program?
Again, a Flex Modification is supposed to reduce an eligible borrower’s mortgage payment by about 20%. If you’re late by 60 days or more, you’re likely eligible.
How Does the Fannie Mae/Freddie Mac Flex Modification Program Work?
The loan servicer reduces the payment by taking one or more of the following steps:
- capitalizing any overdue amounts (adding past-due amounts to the outstanding loan amount)
- lowering the interest rate
- extending the term of the loan (up to 40 years) or
- forbearing some of the principal balance.
Who Qualifies for a Flex Modification
You can apply for the Flex Modification program through your loan servicer if you're behind on your mortgage payments. If you’re over 90 days delinquent on the loan, Fannie Mae and Freddie Mac require the servicer to review your situation to see if you qualify for this program.
Generally, Fannie Mae or Freddie Mac must own your loan for you to qualify for a Flex Modification. You, the home, and the mortgage loan must also meet certain eligibility criteria, including:
- you must have suffered a financial hardship but now have a stable income that will support monthly payments
- the loan must be a conventional first mortgage, and
- you must have taken out your mortgage at least 12 months before being evaluated for a Flex Modification.
The eligibility criteria for this type of modification are quite extensive and complicated. So, call your mortgage servicer to find out if you qualify and learn how to apply. You can also learn more about eligibility criteria by going to the Fannie Mae Flex Modification website and the Freddie Mac Flex Modification website.
Before getting a permanent Flex Modification, a borrower has to complete a trial period plan that typically lasts three months. If the borrower makes all trial payments, a permanent modification, which likely waives prior late charges, penalties, and other fees, goes into place.
How to Find Out if Fannie Mae or Freddie Mac Owns Your Loan
Call your servicer to find out if either Fannie Mae or Freddie Mac owns your loan. You can also use the Fannie Mae and Freddie Mac online loan lookup tools.
If Fannie Mae or Freddie Mac doesn't own your loan, lenders usually offer in-house (“proprietary”) modifications, forbearance agreements, and repayment plans to help borrowers.
How to Apply for a Flex Modification
If your loan servicer hasn’t already contacted you about a Flex Modification, contact the servicer and request a "borrower response package." (A "borrower response package" is essentially a loss mitigation application.)
Submit the package to your servicer after you’ve completed it, and the servicer will consider your request. But if you’re 90 days late or more, the servicer will use a streamlined process, and you won't have to put the package together.
Does a Flex Modification Hurt Your Credit?
Entering into a Flex Modification usually won't have a direct negative effect on your credit scores. Unlike a foreclosure, short sale, or deed in lieu of foreclosure, credit reporting agencies often view a modification more favorably.
Also, after a permanent modification is in place, your scores should improve if you continue to make on-time payments under the new agreement. However, previous delinquent payments will still appear in your credit reports and will have already hurt your credit.
Other Options If You Don't Qualify for a Flex Modification
If you don't qualify for or decide you don't want a Flex Modification, other options that might be available to you include:
- Forbearance agreement. In a forbearance, the loan owner agrees to reduce or suspend your payments for a while. Also, you might be able to get a Flex Modification after you exit a forbearance.
- Repayment plan. In a repayment plan, the servicer temporarily increases your monthly payment by adding part of the overdue amount to your current payments so that you can get caught up on the delinquent amounts.
- Other modification programs. Fannie Mae and Freddie Mac offer different kinds of modifications. And servicers and investors usually offer their own proprietary modifications.
Getting Help
Fannie Mae offers resources and guidance to distressed homeowners on its How to Avoid Foreclosure website. If you have a Freddie Mac loan, you can go to Freddie Mac’s Help Center to learn about available help for homeowners. A HUD-approved housing counselor is also a good resource for information about avoiding foreclosure and can help you for free.
If you’re having trouble making your mortgage payments and need help negotiating a way to avoid foreclosure, consider contacting a foreclosure attorney.