These are unusual economic times, to say the least. Are you behind in mortgage payments? Is your lender threatening foreclosure actions against you? Waiting on your lender to reach out to you with help is not going to improve your financial situation. Instead of facing a mortgage foreclose, there may be other legal and financial options available for you, such as a mortgage modification.
So what is a mortgage modification?
A mortgage modification is a significant chance your lender can make to your loan terms when you are about to miss a mortgage payment or after you’ve missed one or more mortgage payments. The main goal of a mortgage modification is to prevent foreclosure so you get to stay in your home and the lender avoids the expenses of seizing and reselling the property.
In order to qualify for a mortgage modification, you typically must demonstrate that you are suffering from a significant hardship, but not all lenders require this.
What is considered a hardship?
A hardship in terms of a mortgage modification is typically an economic hardship. For example, job loss, furlough, or other complications related to the loss of income may qualify as a hardship with your lender. During the COVID-19 Pandemic, other circumstances may qualify as economic hardship.
How does a modification affect your credit?
Entering into a loan modification will likely have a negative effect on your credit, but it will be less severe than you’d see with a foreclosure and you can take steps to improve your credit that will help you get back on track. At Soble Law, we offer resources and information on how to best build a credit score after a negative impact.
How can a mortgage be modified?
A mortgage modification will lower your monthly payments, though it may result in greater total costs for you over the lifetime of the loan. If you qualify for a mortgage modification, your payment reduction may be achieved through any of several methods, including:
- Reducing your interest rate: Cutting your interest rate by several points can lower your monthly payment significantly. But, rate-reduction modifications often use an approach in which your interest rate and monthly payment amount increase periodically (typically every five years) for the remainder of the loan’s lifespan.
- Extending your repayment period: Stretching out your loan repayment over a longer period of time will reduce your monthly payments. Just keep in mind that doing so may significantly increase the total amount of interest you pay over the life of the loan. If your situation changes and you’re able to afford a higher payment, however, you can consider refinancing to a loan with a better rate.
- Converting from an adjustable to a fixed interest rate: If your financial hardship is related to periodic payment increases associated with an adjustable-rate mortgage (ARM), the lender may opt to convert you to a fixed-rate loan that’s more predictable and manageable.
- Principal reduction: In extremely rare instances, the lender may lower the principal portion of your loan, effectively handing you a chunk of equity in your house. If you’re given that type of modification, consult your tax advisor, because the equity you receive may be considered taxable income.
- Refinancing: Strictly speaking, a mortgage refinance is not a modification because it generates a new loan agreement, rather than adjusting your existing one. It’s seldom a viable alternative for modification candidates because qualifying for a new loan could be difficult. Source: (experian.com)
A loan modification is different from a refinance. When you take a loan modification, you change the terms of your loan directly through your lender. Most lenders agree to modifications only if you’re at immediate risk of foreclosure. A loan modification can also help you change the terms of your loan if your home loan is underwater. Source: (rocketmortgage.com)
The author of this article is Maggie Kelly, an Associate Attorney at Soble Law. She regularly handles finance issues in real estate and probate. She can be reached at MKelly@provenresource.com.