Residential Loan Modification
A loan modification is different from refinancing your mortgage. Refinancing entails replacing your loan with a new mortgage, whereas a loan modification changes the terms of your existing loan.
How does loan modification work?
Getting a mortgage loan modification could mean extending the length of your term, lowering your interest rate or changing from an adjustable-rate mortgage to a fixed-rate loan. Though the terms of your modification are up to the lender, the outcome is lower, more affordable monthly mortgage payments. Foreclosure is a costly process for lenders, so many are willing to consider loan modification as a way to avoid it. Foreclosure is a costly process for lenders, so many are willing to consider loan modification as a way to avoid it.
Who qualifies for a loan modification?
Not everyone struggling to make a mortgage payment can qualify for a loan modification. In general, homeowners must either be delinquent or facing imminent default, meaning they’re not delinquent yet, but there’s a high probability they will be. Reasons for imminent default include the loss of a job, loss of a spouse, a disability or an illness that has affected your ability to repay your mortgage on the original loan terms.
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 doesn’t 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.
How to get a mortgage loan modification
If you are struggling to make your mortgage payments, contact your lender or servicer immediately and ask about your options. Avoiding phone calls or procrastinating will only make matters worse. The loan modification application process varies from lender to lender; some require proof of hardship, and others require a hardship letter explaining why you need the modification. If you’re denied a loan modification, you can file an appeal with your mortgage servicer. Consider working with a HUD-approved housing counsellor, who can assist you for free in challenging the decision and help you understand your options.
Know before you modify
One potential downside to a loan modification: It may be added to your credit report and could negatively impact your credit score. The resulting credit dip won’t be nearly as negative as a foreclosure but could affect your ability to qualify for other loans for a time. If your modification is temporary, you’ll likely need to return to the original terms of your mortgage and repay the amount that was deferred before you can qualify for a new purchase or refinance loan. After permanent modifications, lenders may want to see a record of 12 or even 24 on-time payments to determine your ability to repay a new loan. Be aware that, depending on how your loan is modified, your mortgage term could be extended, meaning it will take longer to pay off your loan and will cost you more in interest. But for homeowners on the brink of losing their homes, the benefits of a loan modification can far outweigh the potential credit risks and extra interest.
Loan Modification: Lower Your Mortgage Payments and Avoid Foreclosure
When you find yourself struggling to make your mortgage payments, you don’t necessarily have to default—you can make a few adjustments and get back on track without doing significant damage to your credit. A mortgage modification program can provide relief by making permanent or temporary changes to your loan. Understanding what a loan modification involves and how to get one can help you stay on top of your loan payments and potentially keep your home.
Basics of Mortgage Modification
A loan modification is a change that the lender makes to the original terms of your mortgage, typically due to financial hardship. The goal is to reduce your monthly payment to an amount that you can afford, which you can achieve in a variety of ways. Your lender will calculate a new monthly payment based on amendments that it makes to your initial mortgage contract.1
Why Lenders Permit Mortgage Modification
Adjusting a loan tends to be less expensive and time-consuming for lenders and can take less of a financial and emotional toll on homeowners compared to other legal or financial remedies for recouping money from a borrower who cannot repay their loan. Without a loan modification, your lender has several unattractive options to choose from to pay off your outstanding debt if and when you stop making mortgage payments. It can:
• Foreclose on your property: A mortgage modification is a less palatable alternative to a foreclosure, which occurs when a bank repossesses a home, evicts the homeowner, and sells the home of a borrower who cannot repay their loan.
• Facilitate a short sale: This refers to the sale of a home for less than what the homeowner owes on their mortgage.3 It still results in the homeowner losing their home.
• Attempt to collect the money you owe through wage garnishment, bank levies, or collection agencies: With wage garnishment, a creditor generally has to get a court order to have a portion of your pay check withheld to pay off your outstanding debt.
• Charge off the loan: In lieu of a foreclosure, a lender might decide to write the loan off as a loss if they determine that the debt is unlikely to be collected.
• Lose the ability to recover funds: If you declare bankruptcy, which can temporarily halt a foreclosure, the bank may not be able to recoup the funds.
The above options will likely either result in the loss of your home or damage to your credit. In contrast, what a loan modification enables a homeowner to do is stay in their home and potentially take less of a hit to their credit score than a foreclosure would cause or even no impact to their credit in the case of some government mortgage modification programs.
Mortgage Modification Options
Your lender might not offer all of these options, and some types of loan adjustments may be more suitable for you than others. However, common alternatives include:
• Principal reduction: Your lender will eliminate a portion of your debt, allowing you to repay less than you originally borrowed. It will recalculate your monthly payments based on this decreased balance, so they should be smaller. This type of mortgage modification is usually the most difficult to qualify for, and lenders are typically reluctant to reduce the principal on loans. They’re more eager to change other features which can result in more of a profit for them. If you’re fortunate enough to get approved for a principal reduction, discuss the implications with a tax advisor before moving forward; you might owe taxes on the forgiven debt.
• Lower interest rate: Your lender can also reduce your interest rates, which will reduce your required monthly payments. Sometimes these rate reductions are temporary, however, so read the details carefully and prepare yourself for the day when your interest rate might increase again.
• Extended-term: You’ll have more years to repay your debt with a longer-term loan, and this, too, will result in lower monthly payments. This option is commonly referred to as “re-amortization.” But longer repayment periods usually result in higher interest costs overall because you’re paying interest across more months. You could end up paying more for your loan than you were originally going to pay.
• Fixed-rate loan: If your adjustable-rate mortgage is proving to be unaffordable, you can prevent problems by switching to a fixed-rate loan where the interest rate is fixed over the loan term.
• Postponed payments: You might be able to temporarily pause loan payments if you’re between jobs but you know that you have a pay check coming in the future, or if you have surprise medical expenses that you know you will pay off eventually. This type of modification is often referred to as a “forbearance agreement.” You’ll have to make up those missed payments at some point, however. Your lender will add them to the end of your loan, so it will take a few extra months to pay off the debt. Punch the numbers into a loan amortization calculator to see exactly how your payment changes when you use any of these strategies.
Loan Modification Government Programs
Depending on the type of loan you have, you may be able to qualify for a government mortgage modification program, which may not negatively impact your credit score at all. Government programs, which include Federal Housing Administration (FHA) loans, U.S. Department of Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans, offer relief, and some federal and state agencies, can also help. Speak with your loan servicer or a HUD-approved counselor for details. For other loans, try the Fannie Mae Mortgage Help Network. The federal government previously offered the Home Affordable Modification Program (HAMP), the Home Affordable Refinance Program (HARP), and Freddie Mac’s Enhanced Relief Refinance Program. However, those have all expired and have been replaced by Fannie Mae’s Flex Modification and the High Loan-to-Value Refinance Option, so these are a good place to start for assistance.
How to Get a Mortgage Modification
Start with a phone call or online inquiry to the lender. Be honest and explain why it’s hard for you to make your mortgage payments right now. Then, let your lender know about your proposed adjustment to the mortgage. Lenders will generally require a loss mitigation application and details about your finances to evaluate your request, and some will require that you also be delinquent with your mortgage payments, often by up to 60 days. Be prepared to provide certain information:
• Income: This is how much you earn and where it comes from.
• Expenses: Be prepared to share how much you spend each month, and how much goes toward different categories, such as housing, food, and transportation.
• Documents: You’ll often need to provide proof of your financial situation, including pay stubs, bank statements, tax returns, and loan statements.
• A hardship letter: Explain what happened that affects your ability to make your current mortgage payments, and how you hope to or have rectified the situation. Your other documentation should support this information.
• IRS Form 4506-T: This form allows the lender to access your tax information from the Internal Revenue Service (IRS) if you can’t or don’t supply it yourself.
The application process can take several hours. You’ll have to fill out forms, gather information, and submit everything in the format your lender requires. Your application might be pushed aside—or worse, rejected—if something your lender asked for is missing or outdated. Different lenders have different criteria for approving loan modification requests, so there’s no way to know if you’ll qualify other than to ask. Within 30 days of receiving a completed application, the lender generally must respond to your application with written notice of its offer or denial along with the specific terms of the mortgage modification. Keep in contact with your lender during this time in case it has questions. It’s usually best to do what your bank tells you to do during this time, if at all possible. For example, you might be instructed to continue making payments. Doing so could help you qualify for the mortgage modification. In fact, this is a requirement for approval with some lenders. Once you receive an offer for a loan modification, you’ll have to accept or deny it within the prescribed timeframe to see the changes reflected in your loan.
Refinance the Loan Instead
Modification is typically an option for borrowers who are unable to refinance, but it might be possible to replace your existing loan with a brand new one. This is a particularly good option if you want to get cash out from the equity that has built up in your home. A new loan might have a lower interest rate and a longer repayment period, so the result would be the same—you’d have lower payments going forward. You’ll probably have to pay application and origination fees on the new loan, however, and you’ll also need decent credit.
Consider Bankruptcy Over Loan Modification
If you can’t get a mortgage modification or refinance the loan, you might have one other option for keeping the property: filing for Chapter 13 bankruptcy. This isn’t the same as a Chapter 7 bankruptcy where the court takes control of your non-exempt assets, if any, and liquidates them to pay your creditors. Chapter 13 allows you to enter into a court-approved payment plan to pay off your debts, usually for three to five years. You can include your mortgage arrears if you qualify, allowing you to catch up, get back on your feet, and even keep your home, but you must typically continue to make your current mortgage payments during this time period. This might be possible, however, if you can consolidate your other debts into the payment plan as well. You must have sufficient income to qualify.
How Forbearance Agreements Work
While a loan modification is a permanent solution to unaffordable monthly payments, a forbearance agreement provides short-term relief for borrowers. With a forbearance, the lender agrees to reduce or suspend mortgage payments for a while. During the forbearance period, the servicer (on behalf of the lender) won’t initiate a foreclosure. In exchange, the borrower must resume making the full payment at the end of the forbearance period, and typically get current on the missed payments, including principal, interest, taxes, and insurance. You can usually:
• pay the amount in a lump sum
• add an extra amount to your regular payments each month until the entire skipped amount is repaid, or
• complete a loan modification (see below) in which the lender adds the unpaid amounts to the balance of the loan.
The specific terms of a forbearance agreement will vary from lender to lender.
If a temporary hardship causes you to fall behind in your mortgage payments, a forbearance agreement might allow you to avoid foreclosure until your situation gets better. In some cases, the lender might be able to extend the forbearance if your hardship isn’t resolved by the end of the forbearance period to accommodate your situation. In a forbearance agreement, unlike a repayment plan, the lender usually agrees in advance for you to miss or reduce your payments.
The Process For Obtaining A Loan Modification
The modification process has several steps. The length of time and the documentation required will vary greatly depending on the lender and the nature of your personal situation.
The basic process for modification is as follows:
• Signature and Documentation: The loan application documents required in the lender’s packet must be completely filled out including required signatures. All documentation must be submitted per the items listed in the packet along with any documentation for your specific circumstance.
• Submission of Documentation: Once the application is completed and the required documents are gathered your loan number and the last 4 of your social security must be noted in the right hand corner of each page. The application and the documentation can then be submitted to your lender via fax, email or US Mail depending on their submittal process.
• Pre-review: The loan application and the documentation, once received by the lender is reviewed by your personal contact person for legibility and completeness. The personal contact person will contact you if the loan application is incomplete or documentation is missing. Contact your personal contact person on a weekly basis to check the status and updates to expedite this process.
• Review: Once your application is considered complete the application and documentation is then sent to an underwriter for review and approval. Depending on the information and documentation that was supplied the underwriter might request additional information or documentation before making a determination. This last step takes approximately 30 days before a determination is made.
• Approval for Trial Payments: Once your application is reviewed and if approved you will be required to make 3 trial payments before your final loan modification is approved. The trial payments need to be made in a timely manner or your loan modification will be denied.
• Final Approval: Once the 3 trial modification payments have been made and received by the lender, the final loan modification will be prepared and sent to you for review and approval. If the terms are acceptable, you must sign and return the loan modification in the allotted timeframe. If you currently are in a bankruptcy, Court approval must be obtained before the loan modification is final. A motion will be prepared to file with the Court and set for hearing in order to get the required Court approval. The loan modification is not final until all the required documents are signed by both the lender and yourself.
Loan Modification Lawyer
When you need legal help with a loan modification in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506