Can A Loan Modification Get Your Mortgage Back On Track?
When your finances unexpectedly take a turn for the worse, it can be nerve-wracking to think about how you’re going to make your monthly mortgage payments. However, you can’t let your fears of defaulting on your loan and losing your home prevent you from taking action. One possible solution is to apply for a loan modification.
In this article, you’ll learn what a mortgage modification is and whether it’s right for you. Take a deep breath and read on.
What Is A Loan Modification?
A loan modification refers to a change made to your loan terms in order to make your loan current. A modification can include:
- Changing your interest rate
- Extending the time you have to repay your balance
- Changing your loan type
Homeowners struggling to make their mortgage payments due to financial hardship may be able to take advantage of a loan modification. Although the process can prevent you from defaulting on your loan, a mortgage modification can still negatively impact your credit score. In the long run, modifying your loan will likely be better for your credit than foreclosure.
Home Loan Modification Vs. Refinance
Loan modification vs. refinance: Which is best? Both a loan modification and a loan refinance would change your mortgage, but the distinct differences between them may make one option better for your circumstances. Take a look:
- Loan modification: Getting a loan modification enables you to make a change to your existing mortgage. Your current lender must agree to change the conditions of your mortgage.
- Refinance: Refinancing replaces your existing mortgage with a new loan. You must submit an application to the lender of your choosing and qualify for the new loan.
Types Of Loan Modification Programs
There are several types of loan modifications and each have different guidelines. Let’s take a look at these loan modification types and how to qualify for them:
Freddie Mac and Fannie Mae are federally backed home mortgage companies that buy and guarantee mortgages on the secondary mortgage market. The two agencies have a shared program that assists those with conventional loans facing financial hardship. If you have a conventional mortgage, you may qualify for a flex modification.
If you obtained an FHA loan, you could qualify for a loan modification program offered by the Federal Housing Administration. The FHA offers a variety of modification programs for eligible borrowers.
VA Modification Programs
The U.S. Department of Veterans Affairs offers modification programs to veterans, active service members and surviving spouses who have a VA loan. Work with your lender to ensure the process goes smoothly.
Your missed payments and potential legal fees get rolled into your remaining loan balance. Your loan servicer comes up with a new payment plan that is more appropriate to your financial circumstances. You must:
- Show you can pay the mortgage.
- Make 12 monthly payments since closing on the mortgage.
- Not have loan modifications in the past three years.
- Not have more than three loan modifications since you closed on your mortgage.
While these are some of the qualifications, they’re not the only ones. It’s important to talk with your lender. They can see your specific financial situation and it you qualify.
How To Get A Mortgage Modification
In order to get a mortgage modification, you'll typically have to provide information about your finances, mortgages, hardship and property. Let's walk through the steps you can take to get a mortgage modification.
1. Call Your Lender
First, inform your lender that you're having trouble keeping up with your monthly mortgage payments. The sooner you reach out to your lender, the more likely you'll arrive at a solution.
When you speak with your lender, explain how your financial circumstances have changed and what caused the change. Provide your lender with insight as to how much you can currently afford to pay and when you think you can resume making your regular payments.
2. Complete A Loss Mitigation Application
Once you’ve spoken with your lender, they’ll most likely ask that you fill out a loss mitigation application. This application acts as a formal request for assistance you may need to provide additional information about your finances.
3. Provide Proof Of Finances
As you fill out the loss mitigation application form, you will be asked to provide proof of your finances. You should expect to include copies of your most recent pay stubs, bank statements and tax returns.
4. Write A Letter Of Hardship
The final piece of your loss mitigation application: a letter of hardship. This step isn’t necessary for everyone, but if one is requested of you, it’s helpful to know what it is and what should go in it. This document must clearly explain why you’re having trouble making your mortgage payments.
When writing a letter of hardship, include:
- A header that provides your name, contact information and loan number. In the introduction, you should specify why you’re seeking a loan modification.
- The body paragraph should concisely explain the circumstances that have made or will likely make you fall behind in your payments and why you cannot gain control over the situation.
- Conclude by letting the lender know you’re seeking a loan modification so you can uphold your obligation and provide the name of any financial counselor you’ve consulted during the process.
5. Accept Or Deny An Offer
After completing the application process, you may receive a modification offer. Your lender may also present you with an alternative, so you can determine whether you’d like to accept or deny the offer.
Alternatives To Loan Modification
What other options exist? Let's take a look at refinancing, forbearance and recasting and how to decide if these are better choices for you than a mortgage adjustment.
Modifications are typically reserved for borrowers at risk for foreclosure. If you simply want more room in your budget, refinancing is probably a better bet, especially if you want to cash out your equity.
Mortgage forbearance is another potential solution for borrowers struggling to make their monthly payments, but it isn't interchangeable with loan modification. In most cases, forbearance is not meant to make lasting changes to your mortgage.
Instead, it allows you to make temporary adjustments to your loan during a period of financial hardship.
Mortgage recasts involve paying a lump sum toward your principal, which can help you lower your monthly payments without changing your interest rate or term. Restrictions exist on the types of loans that qualify for recast. This solution will only work for you if you have the money on hand to make a lump sum payment.
If you're struggling to make your monthly payments, recasting probably won't make the most sense for you.
Loan Modification After COVID-19 Forbearance
Can you get a loan modification after COVID forbearance? It may be possible to get a loan modification after receiving COVID-19 forbearance.
Changes to your loan can depend on your loan type. For example, Individuals with an FHA loan may be able to take advantage of a COVID-19 recovery modification.
Talk to your lender about all of your options.
Loan Modification Pros And Cons
Should you modify your loan or does refinancing or recasting make more sense for your needs? Look at the pros and cons of mortgage modification to help you decide whether loan modification will work for you.
Pros Of A Loan Modification
If your situation qualifies you, a loan modification can:
- Stop an in-progress foreclosure
- Prevent foreclosure before the process begins
- Lower your monthly payments
- Help you catch up on late payments
- Stop you from falling behind on payments
- Resolve delinquency status
- Cause less damage to your credit than foreclosure
Cons Of A Loan Modification
Unfortunately, there can be drawbacks to loan modification as well. Modifying your loan can:
- Hurt your credit score
- Raise your total loan amount
- Be reported as debt settlement
- Show that you didn't fulfill your mortgage contract
Loan Modification FAQ
What is a loan modification?
A loan modification makes changes to your loan terms with the goal of lowering your monthly payments. A modification can lower your interest rate, extend the time you have to repay your balance or change your loan type.
What is the difference between loan modification and refinancing?
With a loan modification, you can make a change to your existing mortgage. Your current lender has to agree to change the conditions of your mortgage. Refinancing, however, replaces your existing mortgage with a new loan. You must submit an application to qualify.
Is it possible to get a loan modification after COVID-19 forbearance?
Yes. If you were impacted by COVID-19, you may be eligible for a modification. It can change the term, interest rate or principal balance to resolve the loan’s delinquency.
What’s the difference between a loan modification and a recast?
Recasting occurs when you make changes to your existing loan after prepaying a large amount of your loan balance. A loan modification, however, happens when your lender allows you to modify the term, rate or loan balance to help you make your loan current.
How can I get a loan modification?
Ask your lender if they offer a loan modification. Some lenders and servicers offer their own loan modification programs, not just loan modification programs related to a government agency.
If your lender or servicer doesn’t have a program of its own, ask if you would qualify for another assistance program or a refinance.
How long does it take to get a loan modification?
The loan modification process typically takes 6 to 9 months, depending on your lender.
The Bottom Line
Even if your lender isn’t able to refinance your loan in the case of financial hardship, they may be open to a loan modification.
A loan modification can be a great tool to avoid a mortgage default if you’re currently facing financial hardship.
If you’d prefer to have your current mortgage rolled into a new loan, a mortgage refinance may be a good alternative. With a loan modification, we’ll modify the terms of your existing loan to include your past-due payments.