What is a Loan Modification and How Does it Work?
Loan modification is a term used to describe a variety of changes made to an existing home loan. Loan modifications may be performed voluntarily by the homeowner and lender or involuntary by the lender for reasons such as default. No matter what type of modification is made, the goal is the same: To keep people in their homes who might otherwise be unable to make their monthly mortgage payments. This article will cover how a loan modification works and why you might consider it if your circumstances change and you need help making your mortgage payments.
What is Loan Modification?
A loan modification is any change to an existing home loan that lowers your monthly payments. Loan modifications can be performed by a homeowner and lender or may be done without your input if you fall behind on your payments. Regardless of the type of modification, the goal is to keep people in their homes who might otherwise lose them. That’s a good thing because foreclosed homes tend to depress the property values of neighboring homes, creating lower tax revenues for cities and towns, which translates into greater demand for government services such as police and fire departments. And that’s not even counting the personal toll on residents who lose their homes through foreclosure.
How Mortgage Loan Modification Works
A loan modification keeps you in your home by lowering your monthly payment to a level that you can afford. The lender’s original agreement with the borrower may have been based on the assumption of certain predictable variables, such as the amount of current income and the interest rate on other loans. If those variables change, so must the amount of money you pay each month to service those loans. For example, if you have other loans that have a higher interest rate than your mortgage payments, or if your income drops because of a job loss or temporary illness, lower payments may be sufficient to keep your home.
Loan Modification vs Refinance
A loan modification does not involve refinancing a home loan, which is a change made to your existing mortgage. Refinancing involves making one or more changes to your current mortgage that affect the payment amount. Re-financings are frequently used to lower monthly payments without incurring interest charges or other fees during the term of the existing mortgage, which can be up to 15 years for federal loans and 25 years for private loans. However, when a loan modification is made to your existing loan without a refinancing, there is no line item charge.
Loan Modification vs Forbearance
A loan modification involves a reduction in the amount of your monthly payment. Forbearance involves a temporary reduction in your pay during a term. Forbearance does not affect interest rates or other fees and therefore is not considered a loan modification. However, forbearances can prevent foreclosure proceedings from being initiated and are often used to protect homeowners from adverse actions for some time.
Who is Eligible For a Loan Modification?
Any homeowner who has a good-faith claim for a modification can ask their lender to make the change. There are no set guidelines for what constitutes “good faith,” so each case is handled on a case-by-case basis. Generally, though, the circumstances must be such that you can no longer make your monthly payments without losing your home or causing financial hardship to yourself or your family. A loan modification is not applicable if you have other financial obligations, such as tax returns to pay or student loans to complete.
How To Request a Loan Modification
If you feel that you qualify for a loan modification, contact your lender directly. The lender will change and keep you in your home in the best-case scenario. If the loans are federally insured, however, they must follow strict guidelines to qualify for protection from foreclosure under the law, so there is no guarantee that your request will be approved. Even if your request is granted, there’s no assurance that it will last for very long under federal law. What’s more likely is that federal loans are refinanced with a similar but different agreement that provides you with some financial relief for a longer term of no more than 15 years.
Mortgage Loan Modification Programs
There are several programs that the federal government has created to help homeowners find ways to pay their mortgages with less money. In some cases, programs will provide you with a full or partial interest-rate reduction on your loan. These are called mortgage interest rate reduction programs (IRRPs). For example, if your home loan is 5% fixed for 20 years and you have a fixed-rate mortgage, you can ask the lender to reduce it to 4% fixed for 30 years.
Is Mortgage Loan Modification a Good Idea?
Loan modifications can be a good idea if you have trouble making your mortgage payments. That’s because the amount of money you pay each month to service your existing loan is the amount you’ll have to make for an extended period. The more expensive your mortgage becomes, the less you can afford to pay each month. For example, dropping your monthly payment by $50 per month might be enough to lower your payments enough to keep you in your home or at least prevent foreclosure and loss of property value.
Mortgage Refinancing and Other Alternatives To Modification
If you are having problems making your payments, there are several alternatives that you may want to consider. One is refinancing your existing loan with a new lender. If the lender who holds your mortgage loan does not offer a loan modification, refinancing can prove to be a smart move for some homeowners for both financial and practical reasons. For example, if the interest rate on your current mortgage is very high, you may be able to refinance with a lower interest rate and save each month on interest while continuing to cover your monthly payment or possibly lowering it further.
What Should You Do?
Contact your lender or other authorized financial company that makes home loans if you have trouble making your payments. Be prepared to present documentation of your income, evidence of any other debt obligations that you may have, and a good-faith claim as to why a loan modification would help you keep your home. If it turns out that you qualify for a loan modification, the lender will take action to reduce the payments on your home loan and keep you in it for as long as possible. For federal loans, this may not last for very long depending on circumstances, so always review any reduction with an expert on federal lending regulations.
Mortgage Loan Modification FAQ
Law requires that lenders offer loan modifications to qualified homeowners who can provide documentation of an inability to make their existing payments. The federal government has created guidelines for each state that are subject to change regularly. Always review your current situation with someone who understands federal lending and can make recommendations for handling it based on your circumstances.
What Happens When You Get a Loan Modification?
If you are successful in getting a loan modification, the lender or other authorized financial company will take action to change your loan agreement so that you can make your monthly payments without exceeding your income level. Your new loan modification might also include various other changes to make it easier for you to deal with, such as temporarily reducing the interest rate on your loan for some time.
How Do I Get a Mortgage Loan Modification?
To get a mortgage loan modification, you must submit evidence that you qualify for the change to your lender. Contact your lender and ask for documentation of the types of documents needed to get a loan modification. The lender will ask you to provide proof, such as copies of tax returns and bank statements showing your current income levels. You also need to present proof of any other financial obligations you have, such as back taxes or child support payments.
How Long Does Loan Modification Last?
Although loan modifications can last for many years, the amount of time depends on many factors. For example, if you have a Federally Insured Loan, the federal government may offer several options to help you stay in your home or at least prevent a foreclosure. If you have other financial obligations, such as student loans or tax returns to pay, they may be included in the funding formula used to decide how long your modification will last.
Does Loan Modification Hurt Your Credit?
No matter what you do, modifying your loan while keeping it in the same hands will likely affect your credit. However, if you refinance or have the loan refinanced, losing or changing your lender can have a much bigger impact on your credit score than a loan modification.
When you need to modify your loan, getting it from the same lender can keep any negative impact on your credit score to a minimum. The main thing that affects your credit score is whether you pay your bills on time. If you have trouble making your payments, it’s best to contact the lender as soon as possible so that they can work with you and make arrangements for a modification.
On the other hand, refinancing or changing lenders can have a major impact on your scores because it indicates that you are taking out new loans and extending the overall amount of money in debt. This can hurt a person who is already having trouble making payments because there is less income available to service both existing loans and their new ones.
How Much Does Mortgage Modification Cost?
The cost of loan modifications varies from lender to lender, so it’s best to contact them and ask for details about financial assistance and how the process works. However, the average cost is $1,700 to $3,000 per modification, depending on the terms offered by your new lender or existing ones.
When you refinance or get a mortgage loan modification, there may be additional costs because the entire process takes time and effort. For example, refinancing loans can take several weeks, during which you do not receive any income and must make payments on your current loan. This can put a strain on your budget that is hard to manage, and the costs related to this should be considered when getting a new loan.
Do You Have To Pay Back a Loan Modification?
No, if the modification is approved and enforced by the lender, you do not have to pay any of it back because it is part of your loan agreement. If your modification is a temporary one, such as reducing the interest rate for six months or adjusting the payment on your loan to make it more affordable in an emergency, there may be a change at the end of that period.
When you need a permanent loan reduction, you and the lender will discuss if you can repay some or all of it. If it turns out that you cannot, the lender may ask for some cash and other collateral to keep the modification in place.
It is important to keep in mind that mortgage modification programs can expire. If you think that your loan will be modified, it is prudent to apply for an extension when the program comes up for review. Even if the loan modification program expires before you are eligible for a permanent change, it can help you get a lower interest rate and other costs associated with a permanent modification.
In conclusion, loan modification programs are necessary to help mitigate the effects of the foreclosure crisis on homeowners. Housing is a very important part of our economy, and those affected by foreclosures must have adequate support to keep their homes until they can recover. Keep in mind that mortgage modification programs can expire, and there are many financial assistance options available for those looking to recover from the effects of foreclosures.