Mortgage Loan Modification
- How Does a Loan Modification Work?
- How do I Qualify for a Loan Modification?
- What information do I need to collect?
- What is HAMP?
- How will a Loan Modification affect my Credit?
- Loan Modification or Refinance, what’s the difference?
The reality is that struggling to make mortgage payments or falling behind on mortgage payments can happen to anyone. If you are faced with the possibility of losing your home, you may start to think about your options. One option that may be just right for you is to get a loan modification.
Depending on the circumstances, lenders may agree to enter into a loan modification with the borrower in order to avoid foreclosure. Naturally, you will have many questions that you will want answered. Do not worry because our lawyers are here to help you.
Our lawyers will work with your lender to get the best possible loan modification and help you through the process of modifying your loan.
Below are answers to common questions that will help you in understanding the loan modification process and what it entails.
How Does a Loan Modification Work?
A loan modification occurs when a borrower and a lender come together and agree to alter the original terms of the loan. During the loan modification process, you and your lender reevaluate the interest, repayment amount and length of the loan. The goal is to lower your monthly mortgage payment to an amount that you can afford.
Typically, this is accomplished by extending the life of the loan. Extending the loan will create a longer repayment period but will also cause there to be a lower monthly payment. This enables the borrower to make lower affordable payments and avoid foreclosure.
How do I Qualify for a Loan Modification?
To qualify, you need to prove financial hardship. Losing your job or suffering from an illness will not automatically qualify you for a loan modification. Lenders look at other factors such as savings accounts, assets, and debt to income ratio. Typically lenders require that your debt exceed your gross income by 41%. This is not a one size fits all, as some lenders require your debt to be higher in order to qualify.
However, that’s not all lenders look at. Lenders also look at what your situation will be in the future. Banks are unlikely to go through with a loan modification if they feel that you are likely to default after the modification.
Thus, in addition to proving a financial hardship, you must be able to show that in the future you will be able to make payments in accordance to the terms of the modified loan.
What information do I need to collect?
Before you begin the modification process, there are several documents and information that must gathered. In addition to gathering the information stated below, you will also need to compose a letter explaining your hardship and how you came to this situation.
- Information about the monthly your gross income.
- Last income tax statement.
- Information about savings and assets.
- Information about your first mortgage.
- Information on any other mortgage you may have.
- Accounts and monthly minimum payments due on all your credit cards.
What is HAMP?
HAMP is the Home Affordable Modification Program. This is a government program that was introduced in 2009 after the mortgage crisis. HAMP targets borrowers who have little to no equity in their home and would otherwise not qualify for a loan modification.
The program is intended to avoid foreclosure and help borrowers who cannot afford their mortgage payments.
Similar to a regular loan modification, HAMP helps struggling homeowners by modifying their loan. This is accomplished by modifying the loans interest. For example, a lender may change the interest to a fixed interest rate instead of a variable interest rate (if the loan is not currently on a fixed interest rate), extending the terms of the loan or making a reduction in the principal amount.
In order to qualify for a loan modification under HAMP, there are certain criteria that must be met.
- The loan originated on or before January 1, 2009.
- The loans unpaid balance is not greater than $729,750 for 1 unit.
- The property cannot be condemned or uninhabitable.
- The borrower’s’ debt to income ratio must meet certain criteria showing financial hardship.
- Borrowers must document income, including signed IRS 4506-T, provide proof of income (paystubs, profit and loss statement, W2, etc.), and sign an affidavit of financial hardship.
How will a Loan Modification affect my Credit?
Loan modifications that occur through HAMP have little to no impact on your credit score. However, if you do not qualify for HAMP or choose to go through the lender modification process, your credit score may be impacted. Keep in mind that a low credit score will see little impact by the modification process whereas a high credit score may be more severely impacted.
However, once your loan has gone through the modification process, timely payments will report positive on your credit score. What this means is that over time, if you continue to pay your mortgage payment on time, your credit score will start to increase.
Loan Modification or Refinance, what’s the difference?
The important difference between the two is that a refinance creates a new loan whereas a loan modification modifies an already existing loan. When it comes to refinancing, the borrower has the option of “shopping around” to get the best rate. This differs from a loan modification because a loan modification is done with the already existing lender.
Refinancing is also a permanent solution. Once the new loan is done, the old loan is canceled. This is not the case with a loan modification. In a loan modification, since the original loan is being modified and not canceled, the modification can be changed or reverted back to its original terms. In simpler terms, a loan modification can be classified as temporary versus the more permanency that comes with refinancing a loan.
With the difference between the two, keep in mind that qualifying for a refinance is not always easy.