Mortgage Loan Modifications are a way to prevent foreclosure and make your payments more affordable. These changes may include reducing the interest rate, extending the loan term, or rearranging the terms of your mortgage.
If you need a mortgage modification, start by speaking to your lender and explaining your financial situation. You will likely be asked to provide documentation that proves your income and expenses.
Reduction in Interest Rate
If you’re struggling with financial hardship, a mortgage loan modification may be an option that can help you get your payments back on track. These modifications can be either permanent or temporary, and can include reducing the interest rate, changing the loan type, lengthening the repayment period, and adjusting the amortization schedule.
In many cases, a reduction in the interest rate associated with mortgage loan modifications can significantly lower your monthly payment amount. This decrease in interest can be a fixed or a temporary change, so you should check your lender’s documentation before agreeing to the modification.
The interest rate is an important factor for lenders, because it helps determine your mortgage payment. If you have a high interest rate, your mortgage payments will be more expensive than they need to be and you could end up paying a lot of money in interest over the life of your loan.
Homeowners with modified loans that have a “step rate” feature typically see an initial interest rate and monthly payment change after a set amount of time, usually five years. After the initial five-year term, your interest rate and payment will gradually increase, and you’ll need to pay attention to any changes in your documentation.
Reducing the principal balance of your loan is also another option that some lenders may offer. While it’s not as common, this can be an option that can make a mortgage more affordable for some borrowers.
A reduction in the principal balance can also have an impact on your credit score, as it will likely be reported to the credit bureaus. This is why it’s crucial to discuss the loan modification with your credit counselor before entering into it, as they can explain any potential impacts on your credit scores and give you advice about which modification would be best for your situation.
Lastly, you should be aware that the process of modifying your mortgage can take months to complete and it will negatively affect your credit, so it’s a good idea to be prepared for these delays. Keeping up with your mortgage payments is also essential if you want to keep your home.
Extension of the Loan Term
A loan modification can extend the original terms of your mortgage. For example, a borrower with a 30-year loan could get an extension of up to five years, which would lower their monthly payments. However, the total interest paid will likely increase.
A common type of loan modification is the Freddie Mac or Fannie Mae Flex Modification, which can reduce a qualified borrower’s mortgage payment by 20 percent or more. It can also include a reduction in the interest rate, partial forbearance on the principal, and an extended loan term.
Another modification is the COVID-19 loan modification, which is available for some borrowers who have been impacted by the foreclosure crisis and are in the process of rehabilitating their homes. This modification involves adding missed payments to the original principal, extending the term of the loan, and agreeing with the lender on a new payment schedule.
These modifications are intended for borrowers who have serious debt problems. They may also be used as loss mitigation for borrowers who are in imminent default.
Jose and Fred are a typical example of a borrower who obtained a 30-year mortgage with 4.19 percent interest in 2007. A few years later, Jose lost his job and is now only working part-time, which has made it difficult for him to meet his obligations.
After a few financial hiccups, Jose and Fred were able to get a loan modification that extended the original term of their mortgage for an additional five years. The loan now has a maturity date of January 1, 2020, and their monthly mortgage payments were reduced from $976 to $873.
In most cases, these extensions can only be granted for a specific period of time. This is because the lender has to prove that you will be able to make your mortgage payments on the modified terms when they are in place.
Depending on the lender and the rules of the modification, your new payments may be more expensive than before. It is important to be aware of how much the extension will cost before you agree to it.
Partial Forbearance on the Principal
If you are unable to pay your mortgage due to financial hardships, you may be eligible for a partial forbearance on the principal of your loan. This option is available to borrowers with federally insured or guaranteed loans, including FHA- and VA-insured loans.
Your mortgage servicer will review your situation and determine if you are a candidate for a partial forbearance on your principal. If you are, the servicer will set up a repayment plan to help you repay your past-due amount over time.
Some borrowers who come out of forbearance are able to pay their past-due amount in one lump sum, but this isn’t always possible. For example, if you have a USDA-insured or an FHA-insured mortgage, the Department of Agriculture (USDA) will only allow you to defer your past-due amounts until you sell the home or refinance the loan.
However, if you are an FHA-insured borrower who has already exited forbearance, the FHA will offer you a second, interest-free option to repay your past-due amount. This option is called the COVID-19 Standalone Partial Claim.
The partial claim payment is a one-time purchase of your past-due amount, not to exceed 30 percent of the unpaid principal balance of your mortgage. The partial claim is repaid through security instruments recorded as a second lien and an interest free promissory note.
Aside from the COVID-19 Standalone Partial Claims and repayment plans, you also have other options to pay off your past-due amount if you are a veteran with a VA-guaranteed loan. These include a payment deferral, repayment plan and private sale.
In many cases, a partial forbearance on your loan is the best way to help you get back on track with your mortgage payments after a temporary financial setback. This option can give you time to recover from your hardship and work with your lender to find a more permanent solution that works for you.
You should speak to your mortgage servicer as soon as you know that a financial hardship is affecting your ability to make your mortgage payments. Your lender will discuss your options with you and may also recommend a debt counselor to help you develop a plan.
Repayment Schedule
When negotiating a mortgage loan modification, the repayment schedule is key. Your lender may offer a temporary reduction in interest rates, which can significantly lower your monthly payments. However, make sure that you read the fine print and ask questions before agreeing to any modification. You don’t want a temporary reduction only to find that the modified amount is added back to your balance and you have to pay the interest on it.
You can also request an extension of your loan term. A longer loan term means that you will have less time to accrue interest, so your payments are lower in the long run. This option can help you keep up with your payments and prevent foreclosure, but it is not always available.
A mortgage loan modification is typically reserved for borrowers who are already behind on their loans and who face financial hardship. If you are considering this option, it’s best to call your lender or loan servicer right away and explain your situation.
Your lender will need to see evidence that you’re experiencing extreme financial hardship, such as reduced income or a large expense. You’ll need to provide your current pay stubs and bank statements, tax returns, and other documents.
If you have an adjustable-rate mortgage, a loan modification could reduce your interest rate or convert you to a fixed-rate loan. This can make your monthly payments more affordable and help prevent foreclosure, as the mortgage loan rate can change during the life of your loan.
Before a loan modification is approved, you’ll have to subscribe to a trial repayment plan. This allows your lender to verify that you can make on-time payments.
The trial period might last months, depending on the loan modification you’re applying for. After this period, your lender will decide whether the new terms are affordable and will approve the loan modification.
You should contact your lender as soon as you know you’ll be falling behind on your mortgage payments. This will give you the best chance of securing a mortgage loan modification.
If you have a VA loan, your lender can roll the missed payments into your principal. This can reduce the overall interest you owe and help your credit rating recover in a short amount of time.
