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About Mortgage Loan Modification
Because of the COVID-19 pandemic, many people have lost their jobs and facing a financial crunch, if you too are struggling to make your monthly mortgage payments or have fallen behind, there are risks of losing your home.
You may be eligible for a loan modification depending on your circumstance, so you can stay on top of mortgage payments and avoid foreclosure.
There is an option called a mortgage loan modification, if you’re in a challenging position, then here’s what you to know about getting a mortgage loan modification.
What is a Mortgage Loan Modification?
Many people confuse a loan modification with refinance mortgage, it is not so, a mortgage loan modification is different from refinancing your mortgage.
Refinancing requires replacing your loan with a new mortgage, while a mortgage loan modification changes the terms of your existing loan.
How does the Mortgage Loan Modification Work?
When you are getting a mortgage loan modification it means you are extending the length of your term, lowering your interest rate, or changing from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
Even if the terms of your modification are up to the lender, the result is lower and more affordable monthly mortgage payments.
As foreclosure is a costly process for lenders, hence many lenders are willing to consider mortgage loan modification as a means to avoid it.
Who Qualifies for a Mortgage Loan Modification?
Everyone who is struggling to make a mortgage payment cannot qualify for a loan modification.
Homeowners who are either delinquent or are on the way to default, where they’re not delinquent yet, but there’s a high probability that they will be.
If you faced a 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 then it can be termed as a reason for imminent default.
Different Types of Loan Modification Programs
Many lenders and servicers offer their personalized loan modification programs, where they can freely make temporary or permanent changes to your terms.
You can ask if you are eligible for any other assistance programs that can help you modify or even refinance your mortgage in case your lender or servicer does not have a program of their own.
Previously the Home Affordable Modification Program was offered by the federal government which had expired at the end of 2016.
Now, we have a foreclosure-prevention program, called the Flex Modification program by Fannie Mae and Freddie Mac which went into effect from Oct. 1, 2017.
And you may be eligible for this program if your mortgage is owned or guaranteed by either Fannie or Freddie.
Underwater homeowners were helped by the federal Home Affordable Refinance Program, or HARP, to refinance into a more affordable mortgage.
Now even HARP has expired and was replaced by Fannie Mae’s High Loan-to-Value Refinance Option and Freddie Mac’s Enhanced Relief Refinance in 2019.
How to Get a Mortgage Loan Modification
Contact your lender or servicer if you are struggling to make your mortgage payments and ask about your options.
When you avoid phone calls or procrastinate then you will only make the matters worse for you.
The loan modification application process differs from lender to lender; some lenders may require proof of hardship, while others may require a hardship letter giving an explanation as to why you need the modification.
And you can file an appeal with your mortgage servicer if you are denied a loan modification.
Work with a HUD-approved housing counselor so they can assist you for free in taking the decision and helping you know your options.
Understand Before you Modify
One of the major downsides to a loan modification is that it may be added to your credit report and could have a damaging effect on your credit score.
Though the credit dip won’t be nearly as bad as a foreclosure but could affect your ability to qualify for other loans for some time.
Before you can qualify for a new purchase or refinance loan you’ll likely need to return to the original terms of your mortgage and repay the amount that was deferred if your modification is temporary.
lenders may want to see a record of 12 or even 24 on-time payments to determine your ability to repay a new loan after permanent modifications.
Your mortgage term could be extended depending on how your loan is modified, which means it will take longer to pay off your loan and the interest will cost you more.
But for homeowners who are on the verge of losing their homes, the benefits of a loan modification can override the potential credit risks and extra interest.
Conclusion
As the loan modification changes the terms of your mortgage it’s more affordable, but it could affect your credit and the amount of interest you would be paying.
