Mortgage Modifications

A mortgage modification could provide the support you need to stay in your home if you’re struggling to keep up with mortgage payments and are searching for ways to escape foreclosure.

A mortgage improvement is a modification to the terms of repayment on your current home loan that decreases your monthly payment. If you can convince your lender that your financial condition has changed in a way that will permanently affect your ability to make your payments as originally negotiated, you will be able to get a mortgage adjustment.

What is a Modification Mortgage?

When you are about to miss a payment or after you have missed one or more mortgage payments, a mortgage adjustment is a substantial improvement the lender makes to your loan terms. Lenders use various strategies to alter mortgages, but the primary purpose is to prevent foreclosure so that you remain in your home and the lender avoids the cost of seizing and reselling the house.

Usually, applying for a mortgage modification allows you to prove a substantial hardship. If you are looking at a mortgage modification, make sure that this service is offered by your lender, as not all do.

It is likely to have a detrimental impact on your reputation to enter into a loan modification, but it would be less serious than you will see in a default, and you may take measures to strengthen your credit that will help you get back on track.

A mortgage modification will minimize your monthly payments, but over the duration of the loan it will result in higher overall costs for you. Your payment reduction can be accomplished by any of many strategies if you apply for a mortgage adjustment, including:

Lowering your interest rate: Lowering your interest rate by several points will substantially lower your monthly payment. Rate-reduction reforms also use a step-up strategy in which the interest rate and monthly payment sum rise for the remainder of the lifetime of the loan annually (typically every five years).

Extending the repayment period: Extending the repayment of your loan for a longer period of time decreases the monthly payments. Only bear in mind that doing so will raise the cumulative amount of interest you pay over the life of the loan substantially. However, if your condition changes and you can afford a higher interest, you can consider refinancing a better-rate loan.

Converting from an adjustable to a fixed interest rate: If your financial burden is connected to adjustable-rate mortgage (ARM)-related periodic payment rises, the lender will opt to convert you to a more predictable and manageable fixed-rate loan.

Refinancing: Strictly speaking, a mortgage refinancing is not a reform because, rather than changing the current one, it creates a new loan agreement. For alteration applicants, it’s seldom a feasible option because it may be difficult to apply for a new loan. But lenders may also recommend this course for borrowers with substantial assets that they can use to cover the loan in a pinch (or that the lender can place a lien against in case of default on the new loan).

Who can receive a change to a mortgage loan?

Mortgage modification eligibility requirements vary from lender to lender, but usually you must:

Be behind or demonstrate that missing a payment is inevitable or at least one daily mortgage payment.

Provide proof of major financial distress, for reasons such as:

Long-term disease or handicap

A family member’s death (and loss of their income)

Catastrophe declared natural or declared

Uninsured depreciation of real estate

Sudden rise in housing expenses, including increases in property taxes or association fees for homeowners

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How to get a modification for a mortgage

If you have missed one or more mortgage payments or, better yet, know that you are about to miss a payment but have not yet become overdue, contact your lender (or the payment collecting service) and clarify the reasons for your payment difficulties.

Be prepared to discuss in some depth your financial problems. As part of a formal application, you will have to record your hardship (for example, loss of income, injury or death of a spouse), so collect appropriate documents before you call so that you will be prepared to answer questions.

Before and after the start of your suffering, the lender would typically require you to apply for the adjustment in writing, and to provide proof of income and expenditures. This may include tax returns, pay stubs, monthly bills and statements, plus your savings information and any assets you might have (investment accounts, real estate and the like).

You may qualify for a government mortgage modification plan if your mortgage is backed by any number of federal agencies or programs:

A policy called Flex Modification, which enables adjustment of mortgage conditions in response to a wide variety of financial hardships, is shared by Fannie Mae and Freddie Mac, the federally sponsored companies that hold more than 95% of U.S. single-family mortgage loans. Qualifying mortgages must be at least one year old, and applicants must be overdue or risk default in respect of their payments.

A number of relief programs may be available for first-time homeowners with mortgages guaranteed by the Federal Housing Administration, known as FHA loans. These include loan forbearance and mortgage adjustment, suspension or reduction of payments for a specified period of months, after which the excused payments must be repaid. Borrowers with FHA loans can also apply for the Department of Housing and Urban Development’s partial demand loans that can be used for forbearance repayment that are not due before the initial FHA mortgage is paid off or the property is sold. Homeowners should request information on FHA programs from the lenders that provided their loans, as with other government-backed mortgage programs.

Active and retired members of the military and surviving spouses with US-backed mortgages The Veterans Affairs Department (VA) can apply for loan modification programs and a range of other programs designed to prevent foreclosure. The VA encourages homeowners to contact their lenders about suitable choices, and to consult for advice with a federal housing counselor.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Protection (CARES) Act, signed into law in late March 2020, provides a wide variety of additional relief options for federally backed mortgage borrowers, including mortgage forbearance for up to 12 months, followed by mortgage modifications if necessary. In view of the recent implementation of the legislation, the nature of such possible amendments, and requirements for applying for them, remain a work in progress. For updates on assistance under the CARES Act, homeowners can contact their mortgage servicer (the organization that collects their mortgage payments).

While only federally guaranteed mortgages are protected by the CARES Act, private lenders can apply similar relief programs to their borrowers.

How does a change to a mortgage loan impact your credit?

Lenders can report your loan modification to the national credit bureaus, and your credit score could be adversely affected by its presence on your credit report. Usually, the long-term effect of a mortgage adjustment would be less severe and long-lasting than the harm caused by foreclosure.

In the case of mortgage modification services that cause you to be late on your payments to qualify, in addition to the modification itself, your credit report may show missed payments. Your first delinquency could cause a greater drop in credit score than a subsequent mortgage modification would, depending on your credit history and the credit score you had before those missed payment(s).

You will be well placed to repair your credit and improve your credit score within a few years if a mortgage modification works as planned and helps you to remain in your house and resume daily on-time mortgage payments, a far better prospect than getting a foreclosure on your credit report for seven years from the date of the first delinquency that led to it. (In the seven years after foreclosure, credit scores will recover dramatically, however many lenders consider a foreclosure on your credit report as a justification for refusing a loan application.)

Mortgage Modification Alternatives

Ask your lender about other choices they can provide to assist you prevent foreclosure if you do not qualify for mortgage modification. Potential possibilities include:

Repayment plans: If you have skipped a few mortgage payments but are able to restore regular payments, after you have repaid the amount you missed (plus interest), after which your payments will revert to the usual amount, a repayment plan will temporarily raise your monthly payments.

Mortgage forbearance: For up to 12 months, a forbearance agreement suspends or decreases your payments, during which you must resume daily payments and reimburse the excused payments during the duration of forbearance. Forbearance services are tailored for borrowers with financial difficulties that are temporary.

Refinancing: If you have good credit and interest rates are more favorable than they were when you got your original mortgage, your mortgage can be refinanced, that is, replaced with a new one with more affordable payments for your original loan.

About the bottom line

Mortgage modification may be a huge help for families experiencing loss of income. If there has been a decline in your financial outlook and you are concerned about losing your home to foreclosure, contact your lender now to see how they can help. Although your credit can take a hit in the process, if you prevent foreclosure and remain in your house, you can come out in better shape in the long run, both financially and emotionally.

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