Loan Modification and Rate and Term Refinance

Updated 2026-05-17

This page describes two distinct but related financial tools: Loan Modification and Rate and Term Refinance. Both involve changing the terms of an existing mortgage loan, but they serve different primary purposes and are typically initiated under different circumstances.

Loan Modification

A loan modification is a permanent change to one or more of the terms of a borrower's mortgage loan, typically made in response to a borrower's long-term financial hardship. Unlike Forbearance, which offers temporary relief, a loan modification aims to make the mortgage payments more affordable on a sustainable basis, thereby helping the borrower avoid Foreclosure.

Common Changes in a Loan Modification

Loan modifications can involve various changes to the original loan terms, including:

• Interest Rate Reduction: Lowering the interest rate to reduce the monthly payment.
• Term Extension: Extending the repayment period (e.g., from 30 to 40 years) to lower monthly payments.
• Principal Forbearance/Reduction: In some cases, a portion of the principal balance may be deferred to the end of the loan term or, less commonly, forgiven.
• Conversion of Arrearages: Adding past-due amounts (unpaid principal, interest, taxes, insurance) to the outstanding principal balance, which are then re-amortized over the new loan term.

Loan Modification Process and Fannie Mae Timelines

The loan modification process often involves an evaluation period and a trial period plan:

• Workout in Review: This is the period during which a servicer evaluates a borrower for a loan modification or other loss mitigation option. For loans with a Last Paid Installment (LPI) due date before June 1, 2012, Government Sponsored Enterprise (GSE) provides an allowable delay credit of up to 60 days per workout. However, no credit is given for loans with an LPI on or after June 1, 2012. This is reported using Delinquency Status Code H5.
• Trial Period Plan: If a borrower is approved for a loan modification, they typically enter a trial period plan, making reduced payments for a few months to demonstrate their ability to meet the new payment terms. Government Sponsored Enterprise (GSE) provides an allowable delay credit of up to 120 days per workout for loans in a trial period plan, reported using Delinquency Status Code BF.

These allowable delays are part of Government Sponsored Enterprise (GSE)'s compensatory fee framework, ensuring that servicers are not penalized for the time taken to process and implement loss mitigation solutions that can prevent foreclosure. Government Sponsored Enterprise (GSE) also provides specific guidance on the interest rates servicers must use for Conventional Loanss, as detailed in the Government Sponsored Enterprise (GSE) exhibit.

Rate and Term Refinance

A rate and term refinance is a type of mortgage refinance where a new mortgage replaces an existing one with the primary goal of obtaining a better interest rate or a different loan term. Unlike a Cash-out Refinance, a rate and term refinance does not involve taking cash out of the home's equity.

Purpose and Benefits of a Rate and Term Refinance

The main objectives of a rate and term refinance include:

• Lowering the interest rate: If market rates have decreased, borrowers can secure a lower rate, reducing the total interest paid over the life of the loan.
• Reducing monthly payments: A lower interest rate or a longer loan term can result in a smaller monthly mortgage payment.
• Changing the loan term: Borrowers can switch from a 30-year loan to a 15-year loan to pay off the mortgage faster, or vice-versa to reduce monthly payments.
• Switching loan types: Homeowners with an Adjustable-Rate Mortgage (ARM) (ARM) may refinance into a Fixed-Rate Mortgage for payment stability, or vice-versa.

General Requirements for a Rate and Term Refinance

While requirements can vary by lender, common guidelines for a rate and term refinance include:

• Credit Score: Typically a minimum of 620. A higher score generally leads to better interest rates.
• Home Equity: Usually at least 20% equity in the home.
• Debt-to-Income (DTI) Ratio: Lenders assess the borrower's DTI to ensure affordability of the new mortgage payment.
• Payment History: Most lenders require a history of on-time mortgage payments for at least the last 12 months.

Closing Costs and Consumer Protections

Closing Costs for a refinance typically range from 2% to 6% of the loan amount. These costs can sometimes be rolled into the new loan, increasing the principal balance but reducing out-of-pocket expenses at closing.

The federal Truth in Lending Act (TILA) and Regulation Z applies to most mortgage refinances, granting consumers three business days to cancel the refinance transaction without penalty, particularly when refinancing with a new lender.