If you’ve fallen behind on your mortgage or expect to, home retention options are the workouts your servicer can offer to keep you in the house: a loan modification that rewrites your terms, a forbearance that pauses payments, a repayment plan that spreads the arrears over a few months, or, for FHA borrowers, a partial claim that moves missed payments into a separate no-interest lien. Federal rules bar your servicer from starting foreclosure until you are at least 120 days delinquent, so there is a real window to act.1eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures The earlier you engage, the more of these options stay open.
The Four Main Options
Each tool answers a different problem. Which one your servicer offers depends on your loan type, how deep the hardship is, and what you can realistically pay going forward.
Loan Modification
A modification permanently changes your mortgage contract. The servicer can lower your interest rate, extend the term, or fold past-due amounts into the new balance. On FHA loans, the term can stretch to 40 years when combined with a partial claim, with a target of cutting your monthly principal-and-interest payment by 25 percent.2U.S. Department of Housing and Urban Development. FHA Adds 40-Year Loan Modification With Partial Claim to Its COVID-19 Recovery Loss Mitigation Options Fannie Mae’s Flex Modification has to produce a fixed-rate loan with a lower monthly payment than you had before.3Fannie Mae. Fannie Mae Flex Modification
Many modifications also include a principal forbearance component, where a portion of what you owe is set aside as a non-interest-bearing balance that sits until you sell, refinance, or reach maturity. This lowers your monthly payment without the servicer writing off the debt. A modification is not a refinance; you don’t apply for a new loan, pay closing costs, or reunderwrite. The existing contract is rewritten.
Forbearance
Forbearance lets you reduce or pause payments during a short-term hardship such as a medical event, temporary job loss, or natural disaster. For most federally backed loans, forbearance can last up to 360 days.4Consumer Financial Protection Bureau. Mortgage Forbearance Ending – Time to Take the Next Step
This is a pause, not forgiveness. Every skipped dollar still has to be dealt with. The important protection: for Fannie Mae, Freddie Mac, FHA, VA, and USDA loans, your servicer cannot require a single lump-sum balloon repayment at the end.5Consumer Financial Protection Bureau. Exit Your Forbearance Carefully The missed payments can instead be handled through a repayment plan, a deferral to the end of the loan, or a modification.
Repayment Plan
A repayment plan works when you’re only a few months behind and your finances have already recovered. You pay your regular monthly amount plus an extra amount that clears the past-due balance over a fixed number of months.6Consumer Financial Protection Bureau. What Is a Repayment Plan on a Mortgage When the plan finishes, the loan is current with no permanent change to your original terms. Servicers usually offer this first for minor delinquencies because it’s the simplest fix.
Partial Claim
For FHA borrowers, a standalone partial claim takes your missed payments and converts them into a separate, interest-free lien on the property. No monthly payment on that lien; it comes due when you sell, refinance, pay off the mortgage, or transfer title.7U.S. Department of Housing and Urban Development. FHA Loss Mitigation Program Because the partial claim carries no interest and no payment, it brings the first mortgage current without raising your monthly cost. VA and USDA loans have their own deferral versions that function similarly.
How to Start and What to Send
Call your servicer as soon as you know a payment will be difficult. You don’t have to wait until you’ve already missed one, and earlier contact leaves you with more options.8Consumer Financial Protection Bureau. How Long Will It Take Before Ill Face Foreclosure if I Cant Make My Mortgage Payments Ask for the loss mitigation department. They’ll send an initial request-for-assistance package, which typically includes a questionnaire and instructions for writing a hardship letter.
The hardship letter is a short, factual narrative of what changed: a layoff, a divorce, a medical crisis. Include specific dates and dollar amounts, and say whether the hardship is temporary or permanent.
Consider calling a HUD-approved housing counselor at the same time. Counseling is free, and counselors know the specific requirements of each loan program, can help you complete the application, and can talk to the servicer for you. HUD’s referral line is 800-569-4287.9U.S. Department of Housing and Urban Development. Housing Counseling
The formal application is called a Request for Mortgage Assistance. A complete, accurate submission is the single most important thing you can do to avoid delays, because servicers reject incomplete packages routinely and each rejection restarts the clock. Gather the documents before you start filling out forms:
- Your two most recent pay stubs and the previous two years of W-2s. Self-employed borrowers need the last two complete federal tax returns with all schedules.
- Bank statements covering the most recent 60 days for every checking, savings, and investment account.
- A full list of monthly debts: car payments, credit cards, student loans, anything with a recurring payment.
- A signed hardship affidavit connecting your finances to the event that caused the default. Some servicers require notarization.
Sign exactly as your name appears on the deed and make sure every page is present. An unsigned page or a missing tax schedule is enough to bounce the whole package.
What Happens After You Apply
Once your servicer receives the application, federal rules require a written acknowledgment within five business days telling you whether the file is complete or what’s missing.1eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures If the complete application arrives more than 37 days before any scheduled foreclosure sale, the servicer must evaluate you for every available loss mitigation option and give you a written decision within 30 days.10eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures
Submitting a complete application also triggers the dual tracking protection. Your servicer cannot file the first legal foreclosure paperwork while your application is under review, and if foreclosure has already started, they cannot move to judgment, order of sale, or sale itself while the evaluation is pending.1eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures
The Trial Period Plan
If you’re approved for a modification, the servicer usually doesn’t go straight to permanent new terms. First you get a Trial Period Plan requiring you to make the proposed new payment amount for at least three consecutive months.11U.S. Department of Housing and Urban Development. Mortgagee Letter 2011-28 – Trial Payment Plan for Loan Modifications and Partial Claims The trial proves the modified payment is sustainable before anyone commits to permanent changes. Make each trial payment on time and in full. A single late or missed trial payment can void the offer.
After a successful trial, the servicer sends the permanent modification agreement. Sign and return it by the deadline. Once recorded, the new terms replace your original loan going forward.
If You’re Denied
A denial has to come with a written explanation. For a modification denial, if your complete application was received at least 90 days before any foreclosure sale, you have 14 days to appeal. Different personnel must review the appeal than the ones who denied you, and the servicer has 30 days to respond.1eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures Dual tracking protection continues during the appeal.10eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures
A denial isn’t necessarily the end. A HUD-approved counselor can help you spot errors in the servicer’s evaluation, and a material change in your circumstances can sometimes support a new application.
Credit and Tax Effects
The credit impact depends on which tool you use and where your account stood when it began. A permanent modification is sometimes reported as a settlement or with a notation of changed terms, which can pull your score down, and the missed payments that led to the modification will generally stay on your credit report for seven years from the date of the first missed payment. It is still far less damaging than a completed foreclosure, and your score starts recovering once you build a track record of on-time payments under the new terms. A successful repayment plan does the least damage; the loan shows current afterward with no permanent notation of modified terms.
Taxes matter when a modification actually forgives principal. The IRS generally treats forgiven mortgage debt as taxable income, and your servicer will report it on Form 1099-C. You have to include it on your return for the year the cancellation occurred, whether or not you receive the form.12Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not
The Mortgage Forgiveness Debt Relief Act used to shield homeowners from this tax on a primary residence. That exclusion expired at the end of 2025 and, as of early 2026, has not been renewed. Congress has extended it at the last minute before, but you cannot count on it for forgiveness in 2026.
Even without that exclusion, the insolvency exception may apply. If your total liabilities exceeded the fair market value of your total assets right before the debt was canceled, you can exclude the forgiven amount from income up to the amount of your insolvency.13Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness Many people going through a modification are, in fact, insolvent. Talk to a tax professional before your modification is finalized.
Modifications that only defer principal or capitalize arrears into the new balance, without actually forgiving debt, do not create a taxable event. Most modifications defer rather than forgive, so this distinction matters.
If You Inherited the Home or Got It in a Divorce
You can apply for loss mitigation even if you haven’t formally assumed the loan. Federal rules require the servicer to preserve your application and supporting documents while your ownership status is confirmed. Once confirmed, the servicer has to evaluate your application as if received on the date your status was verified, and if any documents have aged out in the meantime, the servicer must tell you exactly which ones to update.14Consumer Financial Protection Bureau. Regulation X – 1024.41 Loss Mitigation Procedures If a servicer tells you that you can’t apply because you’re not on the mortgage, that’s wrong, and the regulation says so directly.