Having trouble paying your mortgage? You have options
You may be wondering about modifying a mortgage loan if you:
Financial Troubles Due to Coronavirus Are you experiencing problems making your monthly mortgage payments. Currently on mortgage forbearance but concerned about what's going to happen when indulgence ends
The good news is that help is available. However, mortgage relief options are not a one-size-fits-all solution.
Depending on your circumstances, you may be able to make a loan modification. Or you can take another route like refinancing. Here are some things you should know about your options:
Check your refinancing eligibility (February 17, 2021)
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What is a loan modification?
A loan modification is when a lender agrees to modify the terms of a homeowner's mortgage to avoid default and to keep their home in times of financial hardship.
The aim of any mortgage loan modification is to reduce the borrower's payments so that they can afford their loan month to month. This is usually done by lowering the mortgage rate or extending the loan repayment period.
"A mortgage loan change does not replace your existing home loan or your lender," said Karen Condor, a finance and insurance expert at Loans.org.
"It does, however, restructure your loan to make it more manageable when you are having trouble making your mortgage payments."
How the Mortgage Loan Modification Works
A loan modification does not change the total amount you owe.
"However, the lender may agree to a lower interest rate, shorter loan period, or longer payback period," said Elizabeth Whitman, attorney and executive director of Whitman Legal Solutions, LLC.
Either of these strategies can help reduce your monthly mortgage payments and / or the total amount of interest you will pay over the long term.
The change can also include switching from a variable rate mortgage to a fixed rate mortgage and incorporating late fees into your fund, Condor adds.
Note that a loan modification is to make a mortgage more affordable month to month. However, often the issue is to extend the term of the loan or put back missed payments on the loan – which can increase the total amount of interest paid.
Refinancing into a new loan, on the other hand, often reduces the monthly payment and the total interest cost.
Loan Modification vs. Refinancing
Refinancing is usually the first plan of action for homeowners in need of a lower mortgage payment.
Refinancing can replace your original loan with a new loan with a lower interest rate and / or a longer term. This can lead to a permanent reduction in mortgage loan payments without affecting your creditworthiness.
However, borrowers who are in financial difficulty may not be able to get refinance.
They may have trouble qualifying for the new loan due to lower income, creditworthiness, or unexpected debt (such as medical expenses).
In these cases, the homeowner may be eligible for a modification to the mortgage loan.
Loan changes are usually reserved for homeowners who are not eligible for refinancing due to financial difficulties.
Mortgage modification is usually reserved for borrowers who do not qualify for refinance and who have exhausted other possible mortgage relief options.
"With a loan modification, you are working with your existing bank or lender to modify the terms of your existing mortgage," said David Merritt, consumer finance attorney at Bernkopf Goodman, LLP.
"If you defaulted on your existing mortgage, your credit has likely been so badly affected that a new lender would be wary of re-lending you."
"Refinancing is usually not possible in this situation," says Merritt.
That said, there is no real competition between loan modification and refinancing. The right option for you will depend on the status of your current loan, your personal finances, and the approval of your mortgage lender.
Check your refinancing eligibility (February 17, 2021)
Loan Modification vs. Forbearance
Forbearance is another way servicers can help borrowers during times of financial stress.
Credit forbearance is a temporary plan that pauses mortgage payments while a homeowner gets back on their feet.
For example, many homeowners who lost their jobs or had lower incomes were able to seek leniency for up to a year or more during the COVID pandemic.
As opposed to forbearance, modifying a mortgage loan is a permanent plan that changes the interest rate or terms of a home loan.
Forbearance and loan modification can sometimes be combined to create a more effective mortgage relief plan.
For example, a homeowner whose income is still reduced at the end of their grace period may be eligible for a permanent loan modification.
Or a homeowner who is approved to modify a mortgage can get a portion of their unpaid principal back by the end of the repayment period.
Who can make a loan modification?
Typically, to qualify for a loan modification, a borrower must have missed at least 3 mortgage payments and be in default.
“Sometimes a borrower who has experienced financial setbacks that are imminent in default can qualify for a loan modification. But not everyone who is in default on their mortgage is eligible for a loan modification, ”explains Whitman.
"Borrowers whose financial setback is so severe that they can never repay their mortgage will not receive a change, and borrowers who have the option to make mortgage payments from either their income or savings."
"Borrowers whose financial setback is so severe that they can never repay their mortgage will not receive a change" – Elizabeth Whitman, Attorney at Law and Executive Director of Whitman Legal Solutions, LLC
In addition to submitting a hardship letter or declaration of hardship, prepare yourself for proof of income, the tax return for two years and the bank / annual financial statements, says Condor.
However, be aware that there is no obligation on your lender to make a loan modification.
"Once a lender has an executed contract – that is, the loan – they don't have to change it. Many (homeowners) are denied a change to the mortgage loan," explains Gallagher.
"If the lender wants to change the terms based on your request, you have a starting point."
How to apply for a loan modification
The procedure for requesting a loan modification depends on who is administering your loan.
The first thing you need to do is contact your credit servicer. This is the company you are sending payments to and the company you need to work with to determine your loan modification options.
Some mortgages are managed or "serviced" by the original lender. However, most home loans are serviced by a separate company.
For example, you may have received the Wells Fargo loan but are now making payments to the US bank.
The loan servicer is the company that handles your monthly mortgage payments. You can find yours by checking the name and contact information on your most recent mortgage statement.
Many borrowers begin the process by sending a "hardship letter" to their servicer or lender. A hardship letter is just a note that describes the borrower's financial difficulties and explains why they are unable to make payments.
The lender will likely request financial information and documentation, including bank statements, pay slips, and evidence of your assets.
These documents will help your lender understand the full scope of your personal finances and determine the correct path to mortgage relief.
Mortgage Loan Modification Programs
Your loan modification options will depend on the type of loan you have and what your lender or loan service provider negotiates.
Conventional loan modification
"Fannie Mae, Freddie Mac, and private conventional loan lenders have their own modification programs and policies," says Charles Gallagher, a real estate attorney.
In particular, Freddie Mac and Fannie Mae offer Flex Modification programs that are designed to reduce a qualified borrower's mortgage payment by approximately 20%.
The flex change usually adjusts the interest rate, ignores part of the principal, or extends the loan term to make monthly payments more affordable for the homeowner.
To participate in a Flex Modification program, the homeowner must have:
At least 3 monthly payments overdue for a primary residence, secondary residence, or investment property. Less than 3 monthly payments overdue but the loan is in "imminent arrears" which means the lender has determined that the loan will definitely be in arrears with no change. This is only an option for primary residences
Certain difficulties can trigger the "pending standard" status. For example the death of a main breadwinner in the household or a serious illness or disability of the borrower.
Unemployment is usually not a valid reason for a flex change.
Unemployed borrowers are more likely to be enrolled in a temporary indulgence plan that pauses payments for a set period of time but does not permanently change the term or interest rate of the loan.
Additionally, government-backed FHA, VA, and USDA loans are not eligible for Flex modification programs.
Modification of the FHA loan
The Federal Housing Administration offers its own options for changing loans in order to make payments easier for criminal borrowers.
Depending on your situation, the options to modify the FHA loan may include:
Lower the interest rate. Extend the loan term. Repay unpaid principal, interest or loan costs in the loan balance. Repay the mortgage to help the borrower make up for missed payments
In some cases where additional assistance is needed, FHA borrowers may be eligible for the FHA-Home Affordable Modification Program (FHA-HAMP).
FHA-HAMP allows the lender to postpone missed mortgage payments in order to bring the homeowner's credit up to date. It can then request that HUD (the FHA overseer) further reduce the monthly payment by opening an interest-free subordinated loan equal to up to 30% of the remaining loan balance. The borrower only pays principal and interest based on 70% of the balance and can repay the balance when the home is sold or refinanced.
Shifting this additional capital can help make it easier for FHA borrowers to regain control of their loans.
FHA-HAMP is usually combined with one of the above loan modification methods to lower the borrower's monthly payment.
Eligible FHA borrowers must complete a test repayment plan to qualify for either a loan modification or the FHA HAMP program. This includes punctual payments in the changed amount for 3 months in a row.
VA loan modification
Veterans and service members with loans supported by the Department of Veterans Affairs can ask their servicer about a VA loan modification.
The VA loan change allows missed payments as well as other delayed home ownership expenses such as unpaid property taxes and homeowner insurance to be included back into the loan balance.
After these costs are added to the loan, the borrower and servicer work together to create a new amortization plan that is manageable for the veteran.
Note that the VA change is unique in that the interest rate can actually go up. While this plan can help veterans get their credit updated, it doesn't always reduce the homeowner's monthly payments.
"There are several requirements for changing the VA loan," explains Condor. She explains:
"Your VA loan must be in default. You must have since recovered from the temporary distress that caused the default. You must be able to meet the financial obligations of the VA loan being amended. And you must be your VA – Loans haven't changed in the last three years. "
Some homeowners with VA loans may qualify for a "tightening change".
Optimizing Optimization doesn't require as much documentation as the traditional VA change plan, but it has two additional requirements:
The combined principal and interest payment must decrease by at least 10%. The borrower must complete a three month test repayment plan to demonstrate that they can make the changed payments
Talk to your loan servicer about options for your VA loan.
USDA loan modification
The USDA loan modification is aimed at homeowners whose current loans are supported by the U.S. Department of Agriculture.
A USDA loan modification can return any missing mortgage payments (including principal, interest, taxes, and insurance) to the loan balance.
USDA change plans also provide for term extensions of up to 480 months, or a total of 40 years, to reduce borrower's payments. And the servicer can lower the borrower's interest rate "even below the market rate if necessary," according to the USDA.
Servicers can cover up to 30 percent of the homeowner's unpaid principal with a mortgage prepayment advance.
Contact your loan service provider to find out if you are eligible for a USDA loan modification.
Is Changing The Mortgage Loan A Good Idea?
Modifying the mortgage loan is worthwhile for the right candidates.
"A modification can give you a second bite of the apple and get you out of the standard or foreclosure process, leaving you with the option to stay in your house," says Merritt.
However, reservations apply.
"Typically, when a change is made, all of your missed payments are taken into account and added to the principal amount outstanding," says Merritt.
For example, let's say your current mortgage has an outstanding balance of $ 300,000. Say you missed $ 50,000 on payments. In this example, your modified balance is $ 350,000, which is known as the "Capitalization".
"But imagine if your home is only worth $ 310,000," Merritt adds. “A change here would allow you to stay in your home and avoid foreclosure, but you would owe more than your home is worth. That would be a problem if, for example, you wanted to sell your home two years after the change. "
Refinancing and Other Alternatives to Change
Fortunately, changing the loan is not your only option.
Possible alternatives are refinancing, forbearance, a foreclosure deed, or Chapter 13 bankruptcy.
As mentioned above, the first thing you should check is that you are eligible to lower your interest rate and payment with a mortgage refinance.
You need to qualify for the new mortgage based on:
Credit Score and Credit Report Debt To Income Ratio Credit To Value Ratio (your credit balance relative to the value of your home) Income and Employment
During times of financial difficulty, it can be difficult to qualify for a refinance. Before writing off this strategy, review all of the loan options available.
For example, FHA loans have lower creditworthiness requirements and allow for a higher debt to income ratio (DTI) than traditional loans. Hence, it may be easier to refinance into an FHA loan than a traditional one.
Homeowners with FHA, VA, and USDA loans have an additional option in the form of Streamline Refinance.
Optimized refinance usually doesn't require an income or employment review or a new home appraisal. You can even do without the credit check (although the lender always checks that you made the mortgage payments on time).
These loans are much more forgiving for homeowners whose finances have taken a downturn.
Note: Optimized refinancing is only allowed within the same loan program: FHA-to-FHA, VA-to-VA, or USDA-to-USDA.
Check your Streamline Refi Eligibility (February 17, 2021)
Other mortgage relief options
Refinancing usually requires a credit to equity ratio of 97% or less, which means the homeowner has at least 3% equity.
"However, borrowers with less than 3 percent equity in their homes may qualify for Fannie Mae's HIRO program," suggests Whitman.
This "High LTV Refinance Option" is intended for homeowners with Fannie Mae-sponsored loans who owe more on their mortgage than the property is worth.
"Other options for borrowers with little or no equity in their homes include consensual foreclosure or a short sale, where the property is sold for less than the outstanding mortgage amount."
What should i do?
Whitman continues, "Any borrower who has difficulty paying back their mortgage and other debts after a loan modification should consider whether it is better to sell their home and find cheaper housing."
To better determine whether refinancing or a mortgage loan modification is the right strategy for you, check with your loan service provider, lawyer, or housing advisor.
Mortgage Loan Modification FAQ
What happens when you receive a loan modification?
The goal of a loan modification is to help a homeowner make up for missed mortgage payments and avoid foreclosure. If your servicer or lender agrees to modify the mortgage loan, it may result in a decrease in your monthly payment, an increase or decrease in the duration of your loan, or a decrease in the interest rate you paid.
How do I get a mortgage loan modification?
Contact your mortgage servicer or lender immediately to alert them of your financial hardship and ask about the loan modification options available. Provide all required documentation including financial reports, pay slips, tax returns and more.
How long does it take to modify the loan?
According to finance and insurance expert Karen Condor, your loan modification process is expected to take one to three months. Once your loan modification is approved, the changes to your interest rate and / or loan terms are permanent.
Will a Loan Modification Affect Your Credit?
Modifying the mortgage loan under certain government programs will not affect your credit. “However, other loan changes may adversely affect your creditworthiness and appear on your credit report. However, since your mortgage usually has to be in default to apply for a modification, your financial troubles are likely already included on your credit report, ”explains Attorney Elizabeth Whitman.
Can you be refused a loan modification?
Yes. A mortgage loan is a contract and there is no obligation on the mortgage lender to agree to a loan modification. "Borrowers whose financial situation is such that they can never repay their mortgage loan, as well as borrowers who do not work with lender inquiries, are likely to be denied an amendment," says Whitman.
How much does it cost to modify a mortgage?
While there are no closing costs for a mortgage modification, your lender may charge a processing fee. "If your change involves extending the life of your loan, it means you will pay more interest over the life of your loan," explains Attorney Charles Gallagher.
Do you need to repay a loan modification?
The repayment of a loan modification depends on the type of modification you receive. "Your lender can apply a reduced interest amount to the principal of your loan for the backend that you have to repay later," says Condor. “By changing the capital deferral loan, your lender will reduce the amount of principal paid out with each payment. However, the amount of capital deferred by your lender will become due when your loan falls due or the home is sold. "
Understand your options
Mortgage loan modification is usually reserved for homeowners who are already in default with their loans.
If you are concerned about mortgage payments, check your eligibility for a refinance or contact your loan service provider for information on options before your loan defaults.
Many homeowners are currently facing financial difficulties and many lenders and loan service providers are ready to help. However, help is only available to those who ask for it.
Check your new plan (February 17, 2021)