What Is a Flex Modification and How Does It Lower Your Payment?

Who Qualifies for a Flex Modification?

You qualify for a Flex Modification if Fannie Mae or Freddie Mac owns your loan and you are at least 60 days behind or about to fall behind. The loan must also be at least 12 months old, and you need a hardship plus enough steady income for the new payment.

Imminent default means you are current or only a little behind, but the servicer agrees you are likely to miss payments soon because of a hardship, such as a permanent pay cut. You will need to prove it with income and expense documents.

How Does Fannie Mae Set the New Terms?

Fannie Mae sets the new terms by applying a fixed series of steps until your principal and interest payment drops by about 20% or the steps run out. Its servicing guide on processing a Flex Modification lists them in this order:

1. Add the missed amount to the balance. Past-due interest, escrow advances and some other costs are capitalized. Late fees cannot be added and are waived once you finish the trial.
2. Set a fixed rate. A fixed-rate loan keeps its current rate. An adjustable loan is set to a fixed rate, at least the Fannie Mae Modification Interest Rate, which is a rate Fannie Mae publishes for modifications.
3. Lower the rate if possible. If you owe at least 50% of the home’s value and your rate is above the Fannie Mae Modification Interest Rate, the rate is cut in small steps toward it.
4. Extend the term. The remaining term can be stretched up to 480 months, or 40 years, from the modification date.
5. Set part of the balance aside. If you owe more than 50% of the home’s value, some principal can be moved into a no-interest balance, up to 30% of the new balance.

The 50% figure is the mark-to-market loan-to-value ratio, which compares what you owe after the modification with the home’s current value. A home with plenty of equity usually gets fewer changes, because the target can be reached with the term extension alone.

How Does the Freddie Mac Version Work?

The Freddie Mac version works in a similar way, using the same tools of adding missed payments to the balance, extending the term, possibly lowering the rate and setting principal aside. Freddie Mac’s Flex Modification page says the program is for borrowers who cannot go back to their old payment, and that no part of the balance is written off.

Freddie Mac updated its program for evaluations from December 1, 2024. Its version can also be used on a second home or investment property, while still requiring a lower principal and interest payment than before. An adjustable loan can be changed to a fixed rate.

What Is a Streamlined Flex Modification?

A streamlined Flex Modification is an offer the servicer can send without a full application, usually once you are 90 days or more behind. Fannie Mae’s Flex Modification guide requires a complete application only for borrowers who are current or less than 90 days behind, so a borrower who has gone silent may still get a trial offer in the mail.

The streamlined offer is based only on the loan data, not on your income. If you can send a complete application, do it anyway. The payment based on your real budget may be lower, and Fannie Mae tells servicers to use the lower payment when the documents support it.

What Should You Check Before You Sign?

Before you sign, check the new payment with taxes and insurance, the length of the new term and the size of any amount set aside.

• The full payment: the 20% target applies to principal and interest only, so your escrow for taxes and insurance may change it.
• The new term: a 40-year term lowers the payment but raises the interest you pay over the life of the loan.
• The set-aside balance: this amount, sometimes called principal forbearance, is due when you sell, refinance or pay off the loan.
• The trial rules: every trial payment must arrive on time and in full, or the offer can end.

If your servicer turns you down, the steps to take next are covered in what to do when a loan modification is denied.