How Does Mortgage Modification Work
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.
When youre experiencing a financial hardship, it can be challenging to stay current on your mortgage. A mortgage modification, including the Flex Modification program for borrowers with a conventional loan owned by Fannie Mae or Freddie Mac, adjusts the original terms of your loan to help make your mortgage payments more affordable.
This is especially true for the millions of homeowners who are affected by the coronavirus pandemic and struggling to meet their monthly mortgage obligations. Some form of mortgage relief, such as a mortgage modification program, could provide much-needed assistance during this critical time.
How Do I Get A Loan Modification Approved
The best way toensure a successful loan modification is to review what the underwriters willbe looking for, and to NOT miss a payment in your trial modification.
To get started, youjust have to get in touch with your lender and begin the loan modificationprocess.
They will walk you through the application process, the information that they will need from you, including personal information, proof of a job/income, and a letter of hardship stating a valid hardship, as described above.
Mortgage Modification: How Does It Work
A job loss or another change in circumstance can make it difficult to pay your mortgage.
Falling behind on payments can put you at risk of foreclosure but dont assume the worst. A mortgage modification can help keep your head above water.
A mortgage modification is a hardship program that can make it easier to afford your home loan.
Modifications arent available to everyone, though.
Heres what you need to know about mortgage modifications, including how they work, the advantages and disadvantages, and how to qualify for one.
Types Of Loan Modification Programs
Some lenders and servicers offer their own loan modification programs, and the changes they make to your terms may be either temporary or permanent.
If your lender or servicer doesnt have a program of its own, ask if you are eligible for any other assistance programs that can help you modify or even refinance your mortgage.
The federal government previously offered the Home Affordable Modification Program, but it expired at the end of 2016. Now, Fannie Mae and Freddie Mac have a foreclosure-prevention program, called the Flex Modification program, which went into effect Oct. 1, 2017. If your mortgage is owned or guaranteed by either Fannie or Freddie, you may be eligible for this program.
The federal Home Affordable Refinance Program, or HARP, helped underwater homeowners refinance into a more affordable mortgage. HARP has also expired. Fannie Mae’s High Loan-to-Value Refinance Option and Freddie Mac’s Enhanced Relief Refinance replaced HARP in 2019.
Talk To Your Servicer
Communicate with your servicer. Youll want to speak with someone in the loss mitigation or loan modification department. Keep detailed notes of each conversation and write down the name and contact information for each person you speak with. Ask if they will keep computerized notes of your conversation, and, when someone will get back to you. If no one responds, contact the company again. Keep copies of every document that you send.
Also Check: How To Qualify For Mortgage Modification
Do You Need A Fort Lauderdale Lawyer For A Loan Modification
In many cases, the bank will approve or deny you for a loan modification based on formulas it uses, along with the financial information you submit with your application. In almost all cases, you should avoid hiring a loan modification company, which only act as middlemen, charging you simply to get your financial information, fill out your application, and submit it. After that, you are left to fend for yourself.
Hiring an attorney, however, can be very beneficial in this process. Many people find the application process to be stressful. A Fort Lauderdale loan modification lawyer can help you organize your information and complete your application, then speak with the bank or servicer on your behalf.
Having a Fort Lauderdale loan modification attorney represent you during the loan modification application process means that you have someone protecting your rights. If the bank or servicer violates the law governing loan modifications, for example, or violates other rights you have, an attorney can point out these violations to the bank or servicer and try to get your application approved.
If your application is still denied, and the bank or servicer commences legal action against you, an attorney can assert the banks or servicers unlawful conduct as an affirmative defense or counterclaim to their legal efforts to collect on the debt.
How Much Does A Mortgage Loan Modification Cost: $$$
Some lenders charge a processing fee for making this type of mortgage adjustment. Its best to check with your specific lender to determine what types of fees may be included in the loan modification process.
But heres some good news: There are no closing costs for a mortgage modification.
There are also other options to consider, including refinancing and forbearance.
What Does A Mortgage Loan Modification Do
When a homeowner buys a home, they sign a contract secured by a mortgage against a home. A mortgage loan modification is an agreement by the lender to change the terms of that contract usually to make it easier for the homeowner to make payments in the future, and to resolve missed payments from the past. A loan modification can take many different forms, including an agreement to put the missed payments on the back of the loan, thereby increasing the amount due on the mortgage. Loan modifications can also decrease the interest rate, and extend the length of the loan, which decreases the monthly payments, but can increase the total amount of interest paid over the life of the loan. In rare cases, a lenders loan modification may include a decrease of the principal balance of the loan. In either case, a lender must agree to voluntarily modify the terms of the mortgage.
Loan Modification Scams Abound
The vast majority of modification companies are scammers. They’ll take your money, and you’ll get very little in returnâcertainly, nothing that you couldn’t have done yourself. These companies might tell you they’re experts at negotiating a modification, but there’s really no trick to it. Little to no haggling happens in the loan modification process the investor has specific requirements that borrowers must meet to get a modification, and if you meet them, you’ll get one.
Read Also: What Do Mortgage Companies Look For
Who Is Eligible For A Loan Modification
To qualify for a loan modification, a borrower usually must have missed at least three mortgage payments and be in default.
Sometimes, a borrower who has experienced financial setbacks, which makes a default imminent, can qualify for a loan modification. But not everyone in default under their mortgage is eligible for a loan modification, says Elizabeth Whitman, attorney and managing member of Whitman Legal Solutions, LLC.
Borrowers whose financial setback is so severe that they will never be able to repay their mortgage wont receive a modification, nor will borrowers who have the ability to make mortgage payments either from their income or savings.
Borrowers whose financial setback is so severe that they will never be able to repay their mortgage wont receive a modification
In addition to providing a hardship letter or statement to your current lender, prepare to provide proof of income, two years worth of tax returns, bank statements, and other financial statements, says Condor.
Be aware, however, that your mortgage lender is not obligated to provide a loan modification.
Once a lender has an executed contract meaning the home loan they dont have to change it. Many are denied a mortgage loan modification, Gallagher explains.
If the lender desires to modify the terms, per your request, then you have a starting point.
Understand What A Modification Can And Cannot Do
The goals of a modification are to: prevent foreclosure and make your payments affordable so you can stay in the home.
A modification may lower your interest rate.
A modification may extend the term of your mortgage loan. This lowers your payments but increases the time over which you pay.
A modification may reduce the principal of your mortgage loan. But, principal reduction is not guaranteed and many servicers do not offer it.
The modification may increase your obligation or create a large balloon payment at the end of the loan. Only you can decide to accept a modification. Make sure you understand all the terms of the modification before you sign an agreement.
Also Check: How Long Is The Mortgage Process
When Should You Use A Loan Modification
It makes sense to seek a loan modification before a refinance in some instances. Lets take a look at some of those times.
- Your loan is underwater. An underwater mortgage is when you owe more money on your home than your property will appraise for. Your loan can go underwater if you miss payments early in your term or you live in an area where property values are falling. Most lenders wont allow you to refinance more than your home is worth. Though there are streamline options that can allow you to change your rate and term without an appraisal, you must meet specific criteria to qualify for each option. Ask your lender for a direct modification to simplify the process and help you when youre underwater.
- You need a principal reduction. You cannot reduce your mortgage principal with a refinance. A loan modification may be able to help if youre likely to go into foreclosure.
- Youre behind on your monthly payments. A lender wont allow you to refinance unless youre current on your monthly payments. Some types of refinances for underwater loans require that you have at least six consecutive on-time payments to qualify. Seek a modification if you cant catch up on your monthly payments before you apply.
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.
You May Like: How Long Will It Take To Pay Off Mortgage
How A Mortgage Modification Can Affect Your Loan
There are different loan modification options depending on the type of mortgage. These might include reduced interest, a term extension, switching from an adjustable-rate mortgage to a fixed-rate mortgage or setting aside a portion of the principal to be paid back at a later date .
When obtaining a loan modification, confirm with your lender or servicer whether the modification is temporary or permanent, and what your new monthly payment will be. Always read the fine print, and ask questions if youre unsure about the long-term implications of a modification. Compare the total payments under your original loan to the total payments under the modified loan. What you dont want is a temporary reduction only to find the reduced amount added back on to your mortgage balance and then have to pay interest on the larger balance.
Also, avoid any modifications that are interest-only and adjust to a higher rate, add unnecessary costs to your loan in the form of penalties, fees or processing charges or result in a large balloon payment due after a certain period, Sharga recommends. These types of modifications might only make sense if you plan to hang onto the home just long enough to sell it, in order to salvage your equity and credit.
When Youre Facing An Imminent Default Judgement
A default judgment is a judgment granted by a judge that allows your lender or servicer to take your home without giving you the option to fight against the foreclosure. Default judgments can happen quickly when you dont answer the initial Complaint or when something happens that may be preventing you from paying your mortgage on time like losing your job, contracting an illness, death of a family member, etc. If you are facing a default judgement but havent received one yet, you still have the opportunity to pursue a loan modification for your mortgage and possibly save your home.
You May Like: What Is Required To Be A Mortgage Broker
Mortgage Loan Modification: A Last Resort
If youve missed one or more mortgage payments and you feel like youre out of options, a mortgage loan modification may end up being your best bet.
But before you jump into modifying your mortgage, give yourself a chance to check out all your options so that you can decide which one is right for you.
Should I Hire A Loan Modification Company To Help With My Application
While it may be helpful to hire an attorney, you should avoid loan modification companies. These companies charge a significant amount of money for services you can do on your own, and all they do is act as the middleman between you and your servicer. This service may do more harm than good, as communication and important documents can get lost through the cracks.
Additionally, many loan modification companies are scammy, so in general, it is best to stay away from them.
Also Check: Do You Need Mortgage Insurance With An Fha Loan
How Does A Mortgage Loan Modification Affect Your Credit
Lenders may report your loan modification to the national credit bureaus, and its appearance on your credit report could adversely affect your credit score. The long-term impact of a mortgage modification typically will be less severe and long-lasting than the damage done by foreclosure.
In the case of mortgage modification programs that require you to be delinquent on your payments to qualify, your credit report will reflect missed payments in addition to the modification itself. Depending on your credit history and the credit score you had before those missed payment, your first delinquency could cause a greater drop in credit score than a subsequent mortgage modification would.
If a mortgage modification works as intended and allows you to stay in your house and resume regular on-time mortgage payments, you will be well positioned to rebuild your credit and restore your credit score within a few yearsa much better prospect than having a foreclosure on your credit report for seven years from the date of the first delinquency that led to it.
Roll Late Fees Into The Principal
If you have accrued past-due charges on things like interest, late fees or escrow, some lenders will add that to your principal balance and reamortize the loan. That means the amount you owe will be spread out over time with the new balance. If you extend the length of your loan, you might end up paying less in monthly payments even though you owe more toward your principal.
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.
You’ll Save Money Probably Lots
Loan modification companies charge a lot for services you can perform yourself. Modification companies collect your application paperwork from you and send it to your mortgage servicer. These companies charge thousands of dollars to act as a middleman. It’s much cheaper to handle the modification process yourself instead of paying someone else to do the legwork for you. Also, many modification companies are scammers who will do little or nothing to help you in the process.
Recommended Reading: Are Closing Costs Covered By Mortgage
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.
Who Can Qualify For A Home Mortgage Modification
The top candidates for mortgage modification are homeowners behind on their payments, or in danger of falling behind, and those who are faced with potential foreclosure as a result of unanticipated or unavoidable financial hardship.
Contributing factors that may spur a home loan modification request include:
- Unemployment or other loss of income
- Increased living expenses
- Death of a family member
- You are ineligible to refinance
- You are at least one regular mortgage payment behind or show that missing a payment is imminent.
- A natural or declared disaster.
- An uninsured loss of property.
Lenders almost always examine the borrowers claims and weigh them against the likelihood the customer can fulfill the obligations of the modified loan.
If a homeowners mortgage is backed by federal agencies or programs, they may be eligible for government mortgage loan modification programs.
Government mortgage loan modification programs include:
Some private lenders may be extending relief programs similar to the ones provided in the CARES act.
Also Check: How Much Mortgage Can I Afford Net Income