How Long Does A Loan Modification Take
Sometimes a lender or servicer will offer you a streamlined modification.
The servicer picks an amount they believe you can afford and that they will accept as a monthly payment, offer it to you and upon three successful payments, your loan is modified.
If the lender or servicer does not offer a streamlined loan modification, the process will depend on the mortgage lender, the ability to work through the procedure with your lawyer and other factors. The loan modification process could take to 3-6 months.
These Are Some Of The Cons Of A Loan Modification:
- You may be offered a lower monthly payment in exchange for a higher amount due overall if the payment term is extended, for example from 30 years to 40 years.
- The total amount you would owe in a loan modification agreement may be a lot more than the house is really worth. In other words, you would be repurchasing your home for more than market value.
- There are processing and legal fees associated with the loan modification. These charges may be added to the principal of the loan, but you would still be responsible to pay. If you have any late fees, back taxes or escrow due, those charges may be added to the principal as well.
- If the lender writes off a portion of the principal by reducing the debt you may still be liable for income tax on that portion, although this option does not generally apply to a primary residence.
- The loan modification agreement the bank offers may be reported as a debt settlement and show that you did not honor the original mortgage contract. If it reports the loan modification that way, your credit score would suffer.
- There are no guarantees that you will be able to stay in your home. The lender may decide to encourage you to sell the property if they feel you will not be able to make the payments in the future, or they may deny the loan modification and begin foreclosure immediately.
- If you miss a loan modification payment, the bank may put you right back into foreclosure and escalate the process, creating a very stressful situation
Warnings To People Looking To Apply For Program
Foreclosure rescue and mortgage modification scams are a growing problem. Homeowners must protect themselves so they do not lose money or their home. Scammers make promises that they cannot keep, such as guarantees to âsaveâ your home or lower your mortgage, often for a fee. Scammers may pretend that they have direct contact with your mortgage servicer when they do not.
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Free Resources For Potential Applicants
There are free resources available for potential applicants.
- Homeowners can call the Homeowner’s HOPE Hotline at 1-888-995-HOPE for information about the Making Home Affordable Program and to speak with a HUD approved housing counselor. Assistance is available in English and Spanish, and other languages by appointment.
- HUD.org helps applicants find a local counselor. HUD.gov
- MakingHomeAffordable.gov computes estimated payments and has other resources. Making Home Affordable
- Fannie Mae and Freddie Mac allow applicants see if their loan is owned by one of them and thus potentially eligible for the program Fannie Mae Loan Look UpFreddie Mac Loan Look Up
Your Guide To Sba Loan Modifications
Leveraging the SBA guarantee is an outstanding way for your financial institution to achieve their small business lending goals. SBA loan programs foster job creation and economic development. And when you support small business owners, you grow as wellexpanding your institutional opportunity, revenue and clientele.
Certainly, though, lending to businesses that dont meet traditional bank loan criteria means you may take on more risk of default. Thats why the SBA provides a credit enhancement in the form of a guarantee.
To protect SBA loan guarantees, lenders must follow precise requirements throughout the life of each loan. These requirements can be complicated, detailed and time consuming. Without following them exactly, loan guarantees may be jeopardized or even denied. Prudent Lenders laid out these tips to ensure that your institutions SBA guarantees are protected.
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Documents You’ll Need To Provide With Your Application
To get a modification, you’ll need to submit a complete application to your servicer. As part of that application, you’ll need to provide specific documents. While the exact list of documents your servicer will require might differ from the list below, the following items are generally required as part of an application:
- an income and expenses financial worksheet
- tax returns
- recent pay stubs or a profit and loss statement
- proof of any other income
- recent bank statements, and
Gather Proof Of Your Financial Circumstances
The lender will need proof of your financial situation. To show how much you earn and how much youre spending on basic expenses, gather your:
- Recent tax returns
- Monthly bills
- Asset statements
- You might also need to supply an IRS Form 4506-T, which allows your lender to access your tax information from the IRS
Get to work writing a hardship letter, which explains how you fell behind on payments and how you hope to rectify the problem. Your other documentation should support this information.
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Loan Modification Procedural Guides
The following highlights the SBAs requirements for obtaining a loan modification:
- The SBAs Standard Operating Procedures Manual: This comprehensive guide details the procedures that SBA participants must follow. While the SBA SOP is periodically updated, in modifying a loan lenders should use the SOP that governed at the time the loan was approved .
- 7 Matrix: A table that details the actions and modifications requiring SBA notification and approval and whether said updates need to be made through E-Tran .While the 7 matrix is an excellent reference tool, lenders should always refer to SOP instructions, referencing the version that governed when the loan closed.
Refinancing And Other Alternatives To Modification
Loan modification isnt your only option, thankfully.
Possible alternatives include refinancing, forbearance, a deedinlieu of foreclosure, or Chapter 13 bankruptcy.
As mentioned above, you should first check if youre eligible to lower your interest rate and payment with a mortgage refinance.
Youll have to qualify for the new mortgage based on your:
- Debttoincome ratio
- Loantovalue ratio
- Income and employment
It may be difficult to qualify for a refinance during times of financial hardship. But before writing this strategy off, check all the loan options available.
For instance, FHA loans have lower credit score requirements and allow higher debttoincome ratios than conventional loans. So it may be easier to refinance into an FHA loan than a conventional one.
Homeowners with FHA, VA, and USDA loans have an additional option in the form of Streamline Refinancing.
A Streamline Refinance typically does not require income or employment verification, or a new home appraisal. Even the credit check might be waived .
These loans are a lot more forgiving for homeowners whose finances have taken a downturn.
Note, Streamline Refinancing is only allowed within the same loan program: FHAtoFHA, VAtoVA, or USDAtoUSDA.
Other mortgage relief options
Refinancing typically requires a loantovalue ratio of 97% or lower, meaning the homeowner has at least 3% equity.
What should you do?
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Other Mortgage Modification Programs
Both the Federal Housing Administration and U.S. Department of Veterans Affairs have mortgage modification programs for eligible borrowers.
The FHA loan modification program helps struggling homeowners by using one of the following options:
- Adding late payments to their principal balance.
- Extending their loan term.
- Reducing their outstanding balance by up to 30%.
Eligible borrowers must:
- Not qualify for other mortgage assistance programs.
- Have a DTI ratio of no more than 31% on the front end and 55% on the back end.
- Complete a three- to four-month trial, which depends on whether youre in default or imminent default.
VA loan borrowers who qualify for a modification may receive help by:
- Having their past-due amount added to their outstanding principal balance and calculating a new repayment schedule.
- Extending their loan term and getting a lower monthly payment.
Eligible borrowers must:
- Have made at least 12 monthly payments since your mortgage closing.
- Demonstrate your ability to repay the mortgage and not default.
- Not have had any loan modifications over the past three years.
- Not have had more than three loan modifications since your mortgage closing.
The Loan Modification Process
Loan modifications may make loans more affordable by lowering the required monthly payments. Modifications may also make sense for lenders because modified payments can be better than the loss through foreclosure.
If you are struggling to pay or have already defaulted on your mortgage, you can take action to avoid foreclosure. While each homeowner’s situation is unique, here are some guidelines on getting help.
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Payments To Servicers Lenders And Responsible Borrowers
- The Program will share with the lender/investor the cost of reductions in monthly payments from 38% DTI to 31% DTI.
- Servicers that modify loans according to the guidelines will receive an up-front fee of $1,000 for each modification, plus âpay for successâ fees on still-performing loans of $1,000 per year.
- Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years.
- The program will provide one-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers for modifications made while a borrower is still current on mortgage payments.
- The program will include incentives for extinguishing second liens on loans modified under this program.
- No payments will be made under the program to the lender/investor, servicer, or borrower unless and until the servicer has first entered into the program agreements with Treasury’s financial agent.
- Similar incentives will be paid for Hope for Homeowner refinances.
Loan Modification Vs Refinance
A loan modification shouldnt be confused with a mortgage refinance. You replace your existing mortgage with a brand-new one when refinancing. You go through an underwriting process similar to the one you experienced when first getting a mortgage to buy your home. A modification, on the other hand, changes the terms of your existing mortgage but doesnt replace it.
Refinancing your mortgage usually comes with closing costs and fees, just as your original mortgage did. A modification typically doesnt involve closing costs.
Borrowers who choose to refinance arent required to stick with their current lender they can comparison shop. A loan modification doesnt change your lender.
A mortgage refinance makes sense if youre able to get a new loan with better terms and can qualify to do so, but be sure you exceed minimum requirements for your credit score, down payment amount, employment, income and debt-to-income ratio. There are fewer home loans available for borrowers with lower credit scores and higher loan-to-value ratios, according to the Mortgage Bankers Associations latest Mortgage Credit Availability Index.
But if youre on the verge of missing a mortgage payment or are already in default, a mortgage modification might be the better option for you.
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Qualifying For A Mortgage Loan Modification
Loan modifications are only extended to borrowers in financial crises and who are in danger of defaulting on their original loans.
Lenders can set their own criteria for eligibility, but the requirements are usually that:
- Youve missed at least one payment
- You can provide proof of financial hardship
- You have evidence that you could make your payments with a modified loan
These are typically negotiated through a lawyer or a settlement company.
Laws That Help Homeowners In The Modification Process
As a result of loan servicing problems that arose during the great recession, new rules and laws designed to protect homeowners in the modification process came about. Federal mortgage servicing laws, which went into effect on January 10, 2014, protect borrowers in the loss mitigation process.
Also, some states, like California, have passed a Homeowner Bill of Rights, which regulates how servicers handle modification applications. Nevada, Colorado, and Minnesota, for example, also passed similar laws.
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How Does A Loan Modification Work
If youre eligible for a mortgage modification, your lender may extend the length of your mortgage term.
Lets say you have 15 years left on your mortgage. To lower your monthly payment, the lender might extend your term to 20 or 25 years.
Or if youre paying a higher interest rate, the lender might reduce your mortgage rate. An interest rate reduction can also lower your monthly payment, making it easier to afford the mortgage.
Then again, a modification could involve switching your adjustable-rate mortgage to a fixed-rate mortgage.
Adjustable-rate mortgages have interest rates that reset every year. This is after a temporary fixed-rate period. These loans are riskier because they involve unpredictable mortgage payments.
With a fixed-rate, your interest rate remains the same for the life of the loan. This results in a predictable mortgage payment.
Has a recent rate reset caused your adjustable rate to skyrocket? Switching your home loan to a fixed-rate mortgage might improve affordability.
How Does Flex Modification Work
If youre behind on your mortgage payments, you can apply for the Flex Modification program through your lender. If youre between 90 and 105 days delinquent, though, your lender is required by Fannie Mae and Freddie Mac to review your situation to determine if you qualify.
If youre eligible, the lender might take one or more of the following actions:
- Reduce your monthly payment by as much as 20 percent
- Add past-due amounts, including interest, to your principal balance, so its not all due upfront
- Extend your repayment term to up to 40 years
- Lower your interest rate
- Place a forbearance on a portion of your principal, which wont accrue interest and will be due when the loan matures or you pay it off early
Your lender will review your situation to determine which steps to take. Once that decision is made, youll enter a trial period, where youll make payments as set by the program for a few months. If you complete that period, the lender will bring your loan to current status and your loan modification will become permanent.
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Understanding The Home Affordable Modification Program
HAMP was created under the Troubled Asset Relief Program in response to the subprime mortgage crisis of 2008. During this period, many American homeowners found themselves unable to sell or refinance their homes after the market crashed because of tighter credit markets. Monthly payments became unaffordable when higher market rates kicked in on adjustable-rate mortgages , leaving plenty of people at risk of foreclosure.
Although taxpayers subsidized some of the loan modifications, arguably the most significant contribution of HAMP was standardizing what had been a haphazard loan modification system.
In order to qualify, mortgagors needed to make more than 31% of their gross income on their monthly payments. Property requirements were also enforcedthey had to pass the net present value test, along with other eligibility standards.
A property became eligible if the analysis showed a lender or investor currently holding the loan would make more money by modifying the loan rather than foreclosing. Other than the requirement that a homeowner prove financial hardship, the home had to be habitable and have an unpaid principal balance under $729,750.
In many cases, an already modified loan was eligible for HAMP modification, too, reducing a homeowners payment even further.
Families in the program decreased their monthly payments by an average of more than $530.
All Or Some Of The Above
Some borrowers might need a combination of actions in order to make the monthly mortgage bill manageable. Depending on your need, a lender might reduce the interest rate and extend your loan so that your monthly mortgage payment is reduced in two ways, without touching the principal balance.
The lender likely will go through a cost-benefit analysis when assessing the type of modification that makes sense for both parties.
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Fannie Mae/freddie Mac Plan
In the task at hand to make headway against foreclosures and the depressed housing market. Fannie Mae and Freddie Mac entered a new phase on December 9, 2008 for a fast-track program meant to make “hundreds of thousands of mortgages affordable to people who can’t currently meet their monthly payments.”
Through the SMP, servicers may change the terms of a loan to reduce a borrower’s first lien monthly mortgage payment, including taxes, insurance and homeowners association payments, to an amount equal to 38 percent of gross monthly income. The changes in terms may include one or more of the following: