The Truth About Loan Modifications
The Truth About Loan Modifications
If you fall behind on your mortgage payments, it can be difficult to get them current. This downward spiral of delinquency can have many negative effects including stress, poor credit, and foreclosure. Losing one’s home is a nightmare that has serious short-term and long-term effects.
On the bright side, mortgage companies do not want to see your mortgage fail. It is in their best interest to offer help. One of the options mortgage companies may offer is a loan modification, which can help to lessen payments and get them up-to-date. Unfortunately, because allowing you to keep your home is in the lenders best interest, it may not be in yours as the borrower.
There are benefits and negative consequences involved in the loan modification process, and understanding the details is essential to making an informed decision. Loan modifications can be complex, and unfortunately there are scammers at-the-ready waiting for you to take their bait. However, loan modification can be the tool that people going through financial struggles need to get back on their feet.
Use this guide to learn more about the loan modification process, how it can help you, and where you can find more information:
- What is a mortgage loan modification?
- What modifications can be made on a mortgage?
- When should a loan modification be considered?
- What is the process for a loan modification?
- Will a loan modification affect my credit score?
- Will my mortgage length be extended?
- How can I spot a loan modification scam?
- What are the alternatives to a loan modification?
- Contact Real Estate by Design Idaho today
What is a mortgage loan modification?
Loan modification is a way to lessen mortgage payments and resolve delinquency. This is done by changing the original agreement made at the beginning of your mortgage. Yes, this seemingly unalterable imprisonment of debt is negotiable if you qualify.
Any mortgage company can offer a modification to get their borrower to be able to repay a loan, but the most well-known modification is the Fannie Mae Flex Modification, which replaced the Home Affordable Modification Program (HAMP) in 2017.
In order to qualify for the Fannie Mae Flex Modification, your loan must be owned by Fannie Mae. The Federal government owns the majority of mortgages through companies like Fannie Mae, Freddie Mac, and Ginnie Mae, so there is a good chance that this modification will be an option for you. To see if your loan is owned by Fannie Mae, click here. Otherwise, contact your mortgage company to find out if loan modification is an option.
Other requirements for a mortgage loan modification include being behind on mortgage payments (typically by 2 months) or knowing that you are going to fall behind due to other problems such as a personal hardship or loss of employment. Mortgage loan modifications are not the first line of defense against foreclosure, and they should only be considered when there is good reason to modify. Your mortgage company will want to hear a legitimate reason for modification in order to agree to it.
Loan modifications are a re-negotiation of the original terms of the loan agreement based on the fear of defaulting on a loan and suffering foreclosure. Although it seems somewhat similar to a refinance, it is actually quite the opposite. Refinancing a home loan is a reward for improved credit or a desire for a lower interest rate. It does not negatively impact your credit, and it can be celebrated as a positive financial move.
On the other hand, loan modifications can negatively impact credit, and they are one of the last defenses against foreclosure. As such, they may extend the terms of loans, postpone payments, and are not seen as a positive part of one’s financial history. Still, it can be better than foreclosure. Do not let the negative aspects of loan modification dissuade you from its consideration, but do not view it as a “get out of jail free card” either.
After your loan is modified, any delinquent payments will still be owed at a later date. Payments may be lowered, but the term of the loan will be extended. Banks are not willing to forgo payment indefinitely because you are having a financial hardship. However, they will help you get on your feet, so you can continue to pay them what they are owed.
Ultimately, it is important when considering a loan modification to remember that the bank is not giving you a good deal or taking pity on you when they qualify you for a modification. They are simply trying to recoup potential losses that could occur in a foreclosure. You may have other options that are better for you when facing the loss of your home, such as selling your home or even a short sale if you do not have equity in the real estate.
What modifications can be made on a mortgage?
In general, no two loan modifications will be the same because there are so many options available to help borrowers. Lenders may offer multiple options in order to make a suitable arrangement to the borrower. Typically, they offer modifications that financially benefit the banking institution but at the same time lower payments for the borrower, allowing them to keep up with their payments. Below are some common types of loan modifications offered by mortgage companies:
- Lower interest rate: Mortgage companies may reduce the interest rate on a loan in order to lower payments, but this reduction is usually temporary for a time period of 5 years. Then, the rate steps up gradually to the interest rate cap. The interest rate cap is the market rate at the time of the modification.
- Fixed interest rate: If you are in an adjustable rate mortgage (ARM), then the future is unknown for your interest rates. If you are already struggling to make your mortgage payments, the future could be foreclosure in the event of an interest rate hike. Loan modifications to a fixed interest rate can lessen payments for loans that have already suffered increased interest rates, and they provide peace of mind because they are not going change.
- Change payments: Delinquent payments build up quickly, and they are difficult to pay off even over lengthy time periods. A loan modification can absorb those payments and add them to your new principal balance. This does not mean you don’t owe the money, but it gets you current on your payments.
- Extend term: Sometimes switching from a 30-year loan to a 40-year loan is all it takes to make payments affordable. Beware of this option, as it ends up with you paying much more in interest to the bank.
- Postpone payments: Hopefully, most financial hardships are temporary. Especially in the case of an unexpected job loss, a mortgage company may be willing to postpone payments. This changes the terms of the loan, but it gives you a little reprieve, so you don’t sink into delinquency while job hunting.
- Principal reduction: In rare cases, banks may be willing to consider a principal reduction in order to make your payments more affordable. This case usually exists when it would cost more to foreclose on the home than to reduce the amount owed. While this seems like a great situation, it can create some tax liability.
When should a loan modification be considered?
Financial hardships must already be occurring or be sure to happen in the future in order to consider a loan modification. Sixty days of late payments is typical for considering this option, but you don’t have to be late to consider it. If you are going to be laid off in the next two weeks, and you don’t know how long it will take to be gainfully employed again, it may be a good option. You also have to prove that you will be able to make the modified payments. Banks are willing to work with people to avoid foreclosure costs, but if it is going to be the end result anyway, there’s no point in loan modification.
If you are overwhelmed about getting started or want to make sure you are using all your resources, contact a housing counselor. HUD-approved housing counselors are free, and they can be the primary source of your information in order to proceed with loan modifications. They can also help you with some of the necessities, such as creating budgets and proving the ability to pay modified payments. You don’t have to go through loan modification alone.
What is the process for a loan modification?
The process for loan modification begins with preparation. This means knowing where you are with your mortgage payments and what your current and projected income looks like. Get your mortgage statements together and any other relevant information such as a second mortgage if you have it. Get your current income information together, and try to project your future earnings. Lastly, prepare a short explanation of your financial hardship.
After preparing documents, contact your mortgage company to find out if you are qualified for a loan modification. They will then outline the next steps in the process and give you a loan modification application packet. This will tell you what else you will need to gather such as tax returns and proof of financial hardship (i.e. death certificate, bankruptcy paperwork).
Again, it is good to be educated about the process and use any resources available. That is why it is advisable to get a housing counselor that can help you through the process. In some cases, they will even help you reapply successfully when a modification has been denied. Housing counselors are not required to get a loan modification, but they can help you negotiate with mortgage companies to get the best modified loan.
Will a loan modification affect my credit score?
Loan modifications can impact your credit score. Especially when mortgage companies call it a “debt settlement,” modifications can have a negative impact. However, if it is reported as “paid in full,” it will not have a negative impact.
A foreclosure will definitely negatively impact your credit score, on average by about 150 points. If you are already behind on payments, your score is going to go down because of delinquency and then further by foreclosure. Sometimes, a little ding on the credit score prevents major damage to your credit score.
Will my mortgage length be extended?
Whether or not your mortgage length will be extended depends on the new terms of the loan. In most cases, mortgage companies are not in the practice of forgiving debt, and extending the mortgage length is one easy way to reduce payments. Additionally, if delinquent payments are tacked on to the end of the mortgage, it will take even longer to pay off.
The life of your loan is an important consideration because in most situations, the longer you have the loan, the more money you have to pay to the bank in interest. However, a loan modification does not preclude you from getting a refinance in the future. Once you are back on your feet, maybe you can refinance to a 15-year fixed loan. The biggest thing to consider pre-modification is what you can afford in order to avoid foreclosure.
How can I spot a loan modification scam?
Scams come in many forms, but one thing you should know is that it does not cost money to get counseling services. Some scammers have charged a fee to help people with their loan modifications even though they are well aware that HUD-approved housing counselors are available free-of-charge.
Other indicators of a scam include:
- Asking for a borrower to sign over the title of a property
- Directing mortgage payments to an ulterior source
If you suspect a scam, contact:
What are the alternatives to a loan modification?
A loan modification is not the only option when you’re faced with financial difficulties, and it may not be your best option either. Consider some of the following alternatives:
- Refinance your home
- Rent your home
- Sell your home through a short sale or a deed in lieu of foreclosure
- Declare bankruptcy
- Debt settlement
With so many different options available to you when you’re struggling with financial hardship, you’ll want to consult an experienced real estate agent or attorney to learn which strategy will be the most beneficial to you.
Contact Real Estate by Design Idaho today for more information.
William Lowery is an expert when it comes to providing mortgage solutions and avoiding foreclosure. He is the owner and founder of Real Estate by Design Idaho, and he focuses on building long-term relationships with his clients. This allows him to help his clients make informed decisions during good times but also during hard times, and he keeps long-term financial success as a goal for each person he helps.
Contact William for more information about mortgage solutions, and he will help you find a path that prevents foreclosure.