Not so long ago, home loan modifications were all the rage.
Nowadays, the overall U.S. housing market is back on the upswing, delighting bankers, investors, politicians and, yes, homeowners themselves. That doesn’t mean the bad days of troubled mortgages are over for everyone.
That’s right: Even if mortgage modifications are no longer dominating headlines and driving national policy, it doesn’t mean they aren’t still a thing.
Like those who scrambled to survive the upside-down tumult of the Great Recession, some borrowers still are looking for relief when life sends them potholes. Luckily, mortgage loan modifications offer them the possibility of a way out, while sparing lenders the costly, legally fraught and time-consuming process of foreclosure.
What Is a Home Mortgage Loan Modification?
A loan modification is exactly what it sounds like: a change in the terms of a loan. The objective: achieve a lower, manageable monthly payment.
Typically, applicants are borrowers suffering financial hardship who are in danger of stumbling from default (that is, behind in his/her payments) headlong into foreclosure.
Modification is an alternative to the messy process of foreclosure, bringing relief the homeowner (who gets to stay put) as well as the lender (which doesn’t incur the expense and time lost to foreclosure). It’s sort of a win-win, especially if the borrower is informed, organized, proactive and persistent.
What Types of Loan Modifications Are Available?
A variety of ways exist for a lender to help its distressed client find at least temporary relief. Keep in mind, not all lenders offer all the options listed here. Moreover, your lender might have additional options. It’s best to explore each from an informed position.
Incidentally, loan modifications, like loan applications themselves, are for everyone who complained they’d never use algebra in real life. Payments are the result of an algebraic formula involving three variables: principal, interest rate, and term (length of the loan). In a loan modification, applicants attempt to alter one or more of these variables to reduce their payments.
Principal reduction: We begin with the holy grail of loan modifications — eliminating a portion of your original debt and recalculating your payments based on this new figure. Because the result is a direct hit to their bottom line, lenders are reluctant to saw off a portion of the principal; they much prefer to restructure troubled loans in other ways. If you are approved for a principal reduction, however, consult with a tax professional; the forgiven portion of your loan may be subject to income taxes as regular income.
Lower interest rate: Your lender might be willing to negotiate a break on your interest rate. In some cases, a quarter or even an eighth of a point can make all the difference. This cut may be temporary, however; know the details of your modification and, if your reduction isn’t permanent, be prepared for when your rate, and payment, pop up again.
Extended term: Lenders sometimes are willing to recalculate a loan based on a longer payoff schedule. A 15-year loan can stretch to 20 or 30. Be wary, however, of lenders offering to extend loans beyond 30 years; if the plan is to lengthen your mortgage to 40 years or more, scrutinize the modification for prepayment penalties. Make sure you won’t incur a sanction if you sell the house, or recover yourself sufficiently to refinance into a shorter loan.
Refinance the loan: Modification generally is for borrowers who are in trouble on their mortgages and unable to refinance. However, under certain circumstances — the house has plenty of equity, or the borrower has untapped resources — even a problem borrower can refinance. Replacing your current loan for one with a lower interest rate, a longer term, or both, could drop your monthly payment substantially. The downside: There will be closing costs, and — assuming you stay put for the duration of the loan — you probably will incur higher total interest costs. Loan modifications, by contrast, can be completed faster and without processing fees.
Convert to a fixed-rate: If you have a variable interest-rate loan that’s been ticking toward the point of breaking your budget, you’re definitely a candidate for a fixed-rate loan.
Postpone payments: Suppose your financial bind is temporary. You’re caught between jobs (but you’re undeniably employable), you’ve encountered unanticipated medical expenses, or there’s been some other setback. If you’ve been a model mortgagor, you might be able to skip a handful of payments. Those payments are not forgiven; they’re tacked onto the end of your loan, so you’ll have to postpone your mortgage-burning party, or there will be a larger balance due when you sell your house.
While you’re at it: Look for other ways to save on your payments, especially if you are having your property taxes and insurance put into escrow.
- While county property assessors rarely make significant errors on the taxable value of typical homes, it’s never a bad idea to inspect your annual notice. A mistake in your overall value (overstating the number of bedrooms or bathrooms, or the size of your property) or the value of add-ons (a pool, or out-buildings, size of your property) could add substantially to your tax bill. Do your research, then visit your county property appraiser’s website to learn how to challenge your valuation.
- Make certain your homeowner’s insurance is right for your needs. Review your deductibles. Don’t pay for coverage you don’t need. Shop your policy; prices can fluctuate widely within the same area, depending on how companies weigh various risks.
- Review your private mortgage insurance (PMI) status. Rising property values are your friend: Homeowners often can eliminate PMI premiums if their loan balance is less than 80% of their home’s market value.
Who Can Qualify for a Home Mortgage Modification?
Homeowners who have fallen behind on their payments, or are in danger of falling behind, and are faced with potential foreclosure as a result of unanticipated or unavoidable (and demonstrable) financial hardship may be candidates for loan modifications.
Examples of financial troubles include, but are not limited to:
- Unemployment or other loss of income
- Increased living expenses
- Medical bills
- Divorce or separation
- Death of a family member
In virtually all circumstances, lenders will examine carefully the borrower’s claims and weigh them against the likelihood that when the crisis passes, the customer will be able to fulfill the obligations of the modified loan.
What Types of Loan Modification Programs Exist?
If nothing else, the Great Recession and mortgage crisis made lenders and mortgage-servicing companies more attuned to the needs of at-risk homeowners. (It helped to have Congress and the White House breathing down their necks, but let’s not quibble about progress.)
Nowadays, most lenders have assorted programs designed to see borrowers through tough times while keeping them in their homes. If yours doesn’t, ask your lender or a Housing and Urban Development-approved counselor about your eligibility for programs that can assist you through the modification process.
Two federal programs adopted in response to the mortgage crisis are no longer with us. But substitutes are in place.
HAMP — the Home Affordable Modification Program — expired at the end of 2016. Its successor is the Flex Modification program, overseen by Fannie Mae and Freddie Mac. Borrowers whose mortgages are subject to Fannie or Freddie may qualify.
HARP — the Home Affordable Refinance Program — helped refinance underwater homeowners into new, more affordable mortgages. HARP expired at the end of 2018. Now there are Fannie Mae’s High Loan-to-Value Refinance Option and, from Freddie Mac, the Enhanced Relief Refinance program.
What Steps Are Involved in a Mortgage Modification?
When you’re certain there’s going to be trouble, contact your mortgage holder (mortgagee) immediately, over the telephone or online. Explain your situation and inquire about the available options. Other factors being equal, lenders are more likely to work with at-risk clients who are proactive about their predicament.
Modification applications vary from lender/service to lender/servicer. Most likely, you will be asked to provide proof of your financial hardship; some will require a letter explaining your hardship and why a modification is necessary.
Beyond that, be prepared to document your finances in detail, no less than when you applied for your mortgage in the first place. Some of the information you’ll be asked to provide:
- Income: How much you earn, its sources, and other financial resources.
- Expenses: A record of your spending — how much, and where it goes; be prepared to categorize (housing, transportation, food, clothing, etc.)
- Documents: Back up your statements with paystubs (or profit/loss statements if you’re self-employed), bank and credit card statements, loan agreements, investment reports, recent tax returns and other vital documents.
Just like a mortgage application, a loan modification application can take hours to complete. Once you’ve gathered the documents and related information — which can be time-consuming, even for the well-organized applicant — there will be forms to fill out. Also, your lender is likely to be extremely particular about how it wants information formatted.
Once everything is submitted, make certain you keep your information updated, with replacement documents in timely order. A common complaint among loan modification applicants is that lenders ask for the same document over and over, most often because the original documents have gone out of date. (Yours isn’t the only modification they’re processing, after all.)
It may take weeks before the lender provides an answer, and weeks more to alter your loan, if you get approved. (A majority of applications are denied.) Meanwhile, believe it or not, the clock continues to tick on foreclosure.
What Can Go Wrong?
That’s right. You might be working closely with your lender over a loan modification, responding quickly, earnestly and accurately to questions, providing all the correct documents in a timely fashion, and generally being helpful in every possible way — given your circumstances — and, in the end, you may yet lose your home to foreclosure.
That’s one reason it’s often advisable not to navigate these choppy waters alone. No, that does not mean you turn your application over to anyone who advertises for clients in the media, or who rings you up with an official-sounding name, or asks you to sign over your deed, or who tells you to stop paying your lender and instead pay them, or anyone who says they can make your modification happen with “just a small upfront fee.”
Instead, it means getting with a HUD-certified counselor as soon as possible. It means, if your finances are extremely complicated, inquiring among people you trust, or the local Bar Association, about quality legal representation.
Is a Mortgage Modification Right for Me?
This is the all-important question, because seeking a loan modification commits you to a course of action. In most cases, you cannot pursue a short sale (that is, end your inability to meet your payments by selling the house for less than the mortgage balance), nor can you guarantee you still won’t face foreclosure.
And on top of it all, your credit score is going to get dinged.
Only you know just how dire your situation is, how long it is likely to last, and whether you can endure the storm. By seeking a modification, are you solving a problem, or merely postponing the inevitable?
Have you done all that is reasonable to get your payments current? Have you trimmed your budget or teased out ways to enhance your income?
Again, a HUD-approved counselor may be your best bet. You need a sounding board as well as a guide.
What If Your Application Is Denied?
Banks do turn load modification programs for a variety of reasons, but there is an appeal’s process.
You can only appeal if you sent the request for mortgage assistance in 90 days before your foreclosure sale and the bank denied you for any trial or permanent loan modification programs it offers.
The appeal must be submitted within 14 days after the servicer denied your original application. The servicer must assign the appeal to someone who was not responsible for the original decision to deny your application.
If you are denied a second time, you can’t appeal again. If the servicer decides to offer you a loan modification, you have 14 days to accept or reject it.
Beware the Scam Artists
Anyone in financial distress, especially a homeowner worried about foreclosure, is a target for scam artists.
Be wary of any lending institution that promises a bailout that sounds too good to be true. They will want a fee to do nothing more than take your documents to a lender and ask for the same thing you could ask for yourself.
That, in fact, is where you should start. Whoever holds your loan wants you to be successful in repaying it, so if there is a way to make that possible, they’ll find it. Ask them yourself. Don’t pay someone to do it for you.