Research shows that 23% of American homeowners were unable to pay the full amount of their monthly mortgage payment in April 2020. Of that number, 11% were only able to make a partial payment, and 12% could not make a payment.
Does this include you?
If so, there are resources available to make your mortgage obligation easier to bear. One is a mortgage loan modification, which modifies the terms of your original loan to make your payments and avoid foreclosure.
Today, we’re sharing how this process works so you can discern if it’s the right move for you. Read on to learn the details you need to know.
What Is a Mortgage Loan Modification?
A mortgage loan modification refers to any form of alteration made to your original mortgage loan. The sole aim is to reduce your monthly payment to one that you can afford. A few of the most common approaches include:
- Adding years onto your loan repayment timeline
- Lowering your interest rate
- Forbearing (temporarily pausing or reducing) your mortgage payments
- Lowering your principal balance
- Switching from an adjustable-rate loan to a fixed-rate one
This process is different from refinancing your mortgage. When you refinance, you’re completely replacing your original mortgage loan with a new one. When that happens, you’ll need to go through an underwriting process that’s akin to the one you first completed when you received your original mortgage.
Conversely, a mortgage loan modification simply involves changing the terms of your original loan. You also won’t have to pay additional closing fees, as you would with a loan refinance.
While a mortgage loan modification can offer relief and help you manage your finances, it’s essential to understand the terms before signing on the dotted line. There are different kinds of the programs provided under this umbrella, and entering into the wrong one could mean risking your home.
Government Loan Modification Programs
Depending on the mortgage loan you have, you may also qualify for a government loan modification. These are available for loans provided through the following programs:
- Federal Housing Administration (FHA)
- U.S. Department of Veterans Affairs (VA)
- U.S. Department of Agriculture (USDA)
In years past, other government loan modification options also included the Home Affordable Modification Program (HAMP), Home Affordable Refinance Program (HARP), and Freddie Mac’s Enhanced Relief Refinance Program. However, these have all expired and are now replaced by the following:
- Fannie Mae’s Flex Modification Program
- Fannie Mae’s High Loan-to-Value (LTV) Refinance Option
If you’re looking for federal relief from your mortgage obligation, these programs can be an excellent place to start your search.
How Do Loan Modifications Work?
If you refinance your mortgage, you’re free to comparison shop and change lenders if desired. On the other hand, you’ll be required to stay with your same lender if you undergo a mortgage loan modification.
If you decide to take this step, you’ll work one-on-one with your lender to determine the plan that will work best for you. When you attend this meeting, you’ll need to complete a loss mitigation application. The information you’ll be required to share includes:
- Your current income
- Your monthly expenses, separated into categories
- Documents revealing your financial situation (bank statements, pay stubs, loan statements)
- IRS Form 4506-T (requests a transcript of your tax return)
In addition to this data, you may have to complete and submit a hardship letter. Within this letter, you’ll discuss the situation that is preventing you from making your monthly mortgage payments. You’ll also share the changes you plan to make to ensure that this isn’t a long-term issue.
Make sure to have all of this information on hand before you submit your application. It could be denied or temporarily delayed if you’re missing even one line of detail. Understand that each lender will have their process for filing and reviewing your application.
In most cases, you should have a written response within 30 days, wherein your lender will notify you of their offer or denial. If approved, you’ll also learn the terms of your mortgage modification at this time.
Can I Refinance My Mortgage After a Loan Modification?
There are certain conditions under which you can still secure a mortgage refinancing even after you’ve undergone the loan modification process. To increase your chances, you’ll need substantial evidence that your financial situation has improved since your original modification request.
To this end, most lenders require a span of at least 12 to 24 months in between a modification and refinance. That gives you time to rebuild your accounts, save money, and regain any financial footing you might have lost.
Thus, refinancing applications are most often approved if you requested your modification due to a temporary, short-term financial setback such as:
- Increased expenses
- Reduced income
When you’re ready to refinance the interest rate and repayment terms of your mortgage loan, your lender will check to ensure that your finances are now stable. They’ll also verify that your total monthly expenses do not exceed 40% of your gross monthly income.
Does a Mortgage Modification Affect Your Credit?
While a mortgage modification might make it easier to make your monthly payments, it can damage your credit score. However, your credit will take less of a hit this way, as opposed to the alternative. If you cannot pay your mortgage payments and do not pursue a loan modification, you could face a range of consequences, including:
- A foreclosure on your property
- A short sale
- Aggressive collection steps including wage garnishment and bank levies
- Lenders writing off the loan as a loss
All of these could result in a drastic dip in your credit score. Also, they could also result in the loss of your home. When considered this way, mortgage modification remains the better option. If you pursue this step through a government program, you might even find payment relief without any change to your credit at all.
How Do I Get a Loan Modification on Mortgage?
Are you interested in pursuing a mortgage loan modification? If so, your first step should be to talk to your lender. Be forthcoming and honest and explain the details behind why you have a difficult time making your monthly payments.
Then, you can propose the adjustment as a viable way forward. If your lender agrees with the idea, they’ll send you a copy of their loss mitigation application so you can get started. As you await their decision, be sure to listen to your lender’s instructions and perform the steps they require.
For instance, some lenders will require that you continue making your payments while reviewing your application. Refusing to do so could render you unqualified to continue in the process. Once you receive approval, you’ll have a set amount of time to approve or reject the proposed new terms.
How To Qualify for a Mortgage Loan Modification
You might be stretched thin financially and unable to make your current month’s mortgage payment, but do you qualify for a loan modification?
Each lender has its own qualification requirements to consider when you approach your request. Yet, there are a few general ones that you’ll need to meet even to warrant further review. To be eligible for a mortgage loan modification, you must:
- Be suffering a financial hardship
- Demonstrate proof of why you cannot make your monthly mortgage payments
- Demonstrate proof that you’ll be able to stay on track with a modified payment schedule
The first two factors might be easy to meet. However, think about how you’ll show evidence for the last one. Lenders won’t go to the trouble of processing your application if you’ll be unable to keep up with the new terms and default anyway. You’ll need to show them that with the right tweaks, you can make payments in full and on time.
To this end, an unemployed person cannot qualify for a mortgage modification unless they have a spouse who is working. Document every source of income that your lender can use to assess your ability to pay back the loan.
Find Financial Freedom and Mortgage Assistance Today
If you’re having a difficult time financially, your monthly mortgage payments can be one debt burden that you’re unable to carry. However, you don’t have to put yourself in a higher strain or risk losing your home.
Mortgage loan modification programs help alleviate this hardship. If you qualify, your lender can work with you to adjust the terms of your loan to help lower your payments and make the obligation easier to bear.
Are you looking for more personal finance tips you can trust? We’ve got plenty on our blog. We’ll deliver the facts you need and help you make the tough, smart decisions you need to move forward.