How To Modify Your Loan
Every lender has their own standards for loan modification. Most require you to apply with financial documentation that proves you need the modification. Some of these documents include:
- Proof of income: Your lender needs to know that you dont have enough income to cover your current mortgage. Proof of income can include a salary agreement or contract from your employer that states your hourly rate or annual income. Your lender might ask for a profit and loss balance if youre self-employed.
- Your most recent tax return: Your lender will likely need your entire tax return when you request a modification.
- Bank statements: Your lender might ask for bank statements to confirm your assets.
- A hardship statement: Your lender needs to know why you want a modification. Your hardship letter tells your lender why you can no longer make your monthly payments or pay for your entire loan balance. You may also want to include supplementary documentation along with your letter to further illustrate your situation. Things like medical bills or a termination letter from your previous employer can increase your chances of approval.
Contact your lender and ask how to apply if you think you qualify for a modification. Keep in mind that your lender may refuse your request. You may still qualify for a refinance if that happens to you.
How To Get A Mortgage Modification
If you’ve missed one or more mortgage payments or, better yet, know you’re about to miss a payment but haven’t yet gone delinquent, contact your lender and explain the reasons for your difficulty making payments.
Be prepared to discuss your financial difficulties in some detail. You’ll have to document your hardship as part of a formal application, so gather relevant paperwork before you call so you’ll be prepared to answer questions.
The lender will likely require you to apply for the modification in writing, and to submit proof of income and expenses before and after the onset of your hardship. That could include tax returns, pay stubs, monthly bills and statements, plus information on your savings and any assets you may have .
If your mortgage is backed by any number of federal agencies or programs, you may qualify for a government mortgage modification plan:
While the CARES Act only covers federally backed mortgages, private lenders may be extending comparable relief programs to their borrowers.
Mortgage Loan Modification Programs
Your loan modification options will depend on the type of loan you have and what your lender or loan servicer agrees to.
Conventional loan modification
Fannie Mae, Freddie Mac, and private lenders of conventional loans have their own modification programs and guidelines, says Charles Gallagher, a real estate attorney.
In particular, Freddie Mac and Fannie Mae offer Flex Modification programs designed to decrease a qualified borrowers mortgage payment by about 20%.
Flex Modification typically involves adjusting the interest rate, forbearing a portion of the principal balance, or extending the loans term to make monthly payments more affordable for the homeowner.
To be eligible for a Flex Modification program, the homeowner must have:
- At least 3 monthly payments past due on a primary residence, second home, or investment property
- Or less than 3 monthly payments past due but the loan is in imminent default, meaning the lender has determined the loan will definitely default without modification. This is only an option for primary residences
Certain hardships can trigger imminent default status for instance, the death of a primary wage earner in the household, or serious illness or disability of the borrower.
Unemployment is typically not an eligible reason for Flex Modification.
In addition, governmentbacked FHA, VA, and USDA loans are not eligible for Flex Modification programs.
FHA loan modification
VA loan modification
USDA loan modification
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What Are The Pros And Cons Of A Loan Modification
The Pros of a Loan Modification
- You would avoid foreclosure and remain in your home.
- If you are behind on payments, you would resolve your delinquency status.
- You may be able to reduce your monthly payments so they are more affordable.
- You would suffer less damage to your credit than if the bank foreclosed on your house.
How Loan Modifications Work
Lenders are often willing to adjust the terms of a loan because its less expensive and time-consuming than going through the foreclosure process. Depending on the lender and the program, you might be able to:
- Lower your interest rate: Decreasing your mortgage rate by one or two points can substantially lower your monthly payment. But make sure to ask if the interest rate will go back up. Some lenders use a step-up approach, in which your interest rate and monthly payment gradually increase for the rest of the loan term.
- Extend your loan term: Extending your mortgage term by several years will lower your monthly payments, which can put some wiggle room in your budget. However, youll pay more interest over the life of the loan.
- Switch loan types: If you have an adjustable-rate mortgage and your payments change periodically, your lender might be willing to convert your loan to a fixed rate. Because the rate wont change, your payments could become more predictable and manageable.
- Reduce the principal owed on your loan: The lender might also lower the principal portion of your loan so you have less to pay off. This type of modification is rare because it essentially gives the borrower free equity. If youre given this option, talk with a tax adviser about whether the principal would be considered taxable income.
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Alternatives To Mortgage Modification
If you do not qualify for mortgage modification, ask your lender about other options they may offer to help you avoid foreclosure. Potential options include:
- Repayment plans: If you’ve missed a few mortgage payments but are able to resume regular payments, a repayment plan can temporarily increase your monthly payments until you’ve repaid the amount you missed , after which your payments will return to the normal amount.
- Mortgage forbearance: A forbearance plan suspends or reduces your payments for up to 12 months, after which you must resume regular payments and repay the payments excused during the forbearance period. Forbearance programs are designed for borrowers with temporary financial challenges.
- Refinancing: If you have good credit and interest rates are more favorable than they were when you got your original mortgage, it may be possible to refinance your mortgagethat is, replace your original loan with a new one with more affordable payments.
Steer Clear Of Refinancing Scams
Some homeowners become the target of fraudulent refinancing offers. Such fraudulent refinancing offers may begin with a call from an underwriter, who may pretend the call is from the homeowners current mortgage lender and make a refinance offer that is hard to pass up . If it sounds too good to be true, it probably is!
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Loan Modification Vs Forbearance
Forbearance is another way servicers can help borrowers during times of financial stress.
Loan 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 reduced income were able to request forbearance for up to a year or more during the COVID pandemic.
Unlike forbearance, mortgage loan modification is a permanent plan that changes the rate or terms of a home loan.
Forbearance and loan modification can sometimes be combined to make a more effective mortgage relief plan.
For instance, a homeowner whose income is still reduced at the end of their forbearance period may be approved for a permanent loan modification.
Or, a homeowner approved for mortgage modification may also have part of their unpaid principal forborne until the end of the repayment period.
Keep Your Credit Rating Up
Check into your credit rating – it will be a factor in whether you get approved or not. Order copies of your credit report from all three major credit agencies, Experian, Equifax and TransUnion – you’re entitled to one free copy a year from each – and review them for errors or omissions that might be hurting your credit.
Also, do what you can to improve your credit rating or, at least prevent it from declining. Pay down major credit card debt, if possible otherwise, avoid piling up debt if finances are tight. Pay all bills on time, including utility payments but particularly installment debt like your auto loans and credit cards. If you’re in a pinch, be aware that creditors generally won’t report you as late unless you miss a payment by a least 30 days – but try not to get in the habit of “juggling” delayed payments.
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What Is A Mortgage Loan Modification
Simply put, loan modification is a change that lenders make to the terms of an existing mortgage.
Such changes usually are made because the borrower is unable to repay the original loan. Most successful loan modification processes are negotiated with the help of an attorney or a settlement company. Some borrowers are eligible for government assistance in loan modification.
Whats in it for the mortgage company?
Loan modification isnt nearly as costly to the lender as default and/or foreclosure. The mortgage company wants to keep you in the house just as much as you want to stay.
How Do You Get Approved For A Loan Modification
That being said, there are some basic guidelines that you have to meet to qualify for any type of loan modification:You have to be suffering a financial hardship. You have to show you cannot afford your current mortgage payments. You have to be able to show that you can stay current on a modified payment schedule.More items
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Learn What To Doand What Not Doin The Loan Modification Process
By Amy Loftsgordon, Attorney
If you can’t afford your mortgage payments, getting a loan modification just might keep you out of foreclosure. Your eligibility for a modification is determined by the investor’s set of guidelinesnot everyone will qualify.
While it’s mostly a numbers game that looks at your income, loan payment, and financial circumstances, you can help or hurt your chances of getting approved for a modification with your actions during the process. If you meet the program requirements and take all necessary steps, you’ll get one.
Because your actions can be vitally important in getting your loan modified, it’s essential that you to learn the do’s and don’ts of the process.
How Does It Work
A modification involves one or more of the following:
- Changing the mortgage loan type
- Extending the term of the mortgage
- Reducing the interest rate either temporarily or permanently
- Adding any past-due amounts, such as interest and escrow, to the unpaid principal balance, which is then reamortized over the new term
Use this tool to estimate how a Modification might help you.
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How Is Daily Interest Calculated
Calculate the daily interest rate You first take the annual interest rate on your loan and divide it by 365 to determine the amount of interest that accrues on a daily basis. Say you owe $10,000 on a loan with 5% annual interest. Youd divide that rate by 365 to arrive at a daily interest rate of 0.000137.
How Does Mortgage Modification Work
Home loan modification could mean lengthening the terms of your loan, lowering your interest rate or changing from an adjustable-rate mortgage to a fixed-rate loan. The goal in each case? More manageable monthly payments.
While modification likely will impact your credit score negatively, it wont impact it as drastically as foreclosure would.
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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.
How To Refinance Your Loan
Youll choose a lender, submit an application and offer your personal financial documentation for underwriting. Your lender will usually give you the option to lock in your interest rate as well. This protects you against market interest rate movements.
After you lock in your rate, your lender underwrites your loan to make sure you qualify to refinance. With most types of refinances, you must get another appraisal before you can close on your new loan. The appraisal ensures the lender that theyre not loaning you more money than your home is worth. Once the appraisal and underwriting processes are complete, your lender will give you a Closing Disclosure. The Closing Disclosure tells you more about the terms of your loan and your closing costs. Youll then attend a closing meeting and sign on your new loan.
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Steer Clear Of Mortgage Modification Scams
Be wary of people that offer assistance with a modification for a fee. Borrowers can always work with their bank on their own for free, and help is available for free from HUD-approved non-profit organizations.
If a borrower encounters difficulty dealing with a mortgage servicer, the borrower can always contact the Minnesota Attorney Generals Office, too. In addition, some fraudsters have called homeowners pretending to be the homeowners mortgage servicer and asking for private financial information. Do not provide private financial information to people who call you unexpectedlyâcall the bank at its known phone number to be sure youre talking to a bank representative!
Switch From An Adjustable
Switching from an adjustable-rate mortgage to a fixed-rate mortgage might not lower your existing payments, but it could help protect you from rising interest rates down the road.
Since ARMs are set up to have floating rates, they change with the market. For example, if your interest rate is 3.5% and the average rate rises to 4%, so will your rate. This can be a bad scenario if youre in a rising-rate environment. By locking in your interest rate, youre guaranteed to pay the same interest rate over the life of your loan, regardless of what the market does.
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How Many Times Can I Modify My Mortgage
Is it possible or will it be more difficult to get another modification? Yes, it is possible to get a second loan modification though statistically its obvious that you are less likely to get a second modification if youve had a first, and a third if you were lucky enough to get a second. It is possible though.
Mortgage Loan Sold To An Investor
As we mentioned, it’s possible for your mortgage lender to sell your loan to another company or investor whenever they choose. This includes during a loan modification process, whether you’ve just submitted the application to get the ball rolling, or you’ve been approved but the details haven’t yet been finalized.
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Fannie Mae Flex Modification
A mortgage loan modification might be available to borrowers who are experiencing a permanent or long-term hardship and can no longer afford to make regular monthly mortgage payments.
The Fannie Mae Flex Modification offers eligible homeowners mortgage payment relief by extending the term to 480 months and targeting a 20% principal and interest reduction. The modification may also result in a lower interest rate.
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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Reduce The Principal Balance
In rare circumstances, lenders will actually lower the amount you owe, also known as a principal modification. These were more common during the housing crisis when loose lending standards prevailed and home values tanked, leaving many borrowers underwater with their mortgage.
Whether a lender decides to reduce the principal likely depends on the current local housing market, how much you owe and what their loss would be if they went this route versus a foreclosure.
Which Kind Of Interest Is More Beneficial To A Borrower
When it comes to investing, compound interest is better since it allows funds to grow at a faster rate than they would in an account with a simple interest rate. Compound interest comes into play when youre calculating the annual percentage yield. Thats the annual rate of return or the annual cost of borrowing money.
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