Since March 2020, millions of homeowners applied for and received forbearance on their mortgage. However, this relief has expired, along with lenders’ patience. Now, thousands of dollars that were not paid during the pandemic are now due to mortgage service providers. Home loan modification is the solution for some homeowners, but is it right for you? Read on to learn more and make this determination for yourself.
What Is a Home Loan Modification?
A home loan modification is when a mortgage service provider agrees to alter the original terms of a homeowner’s existing mortgage loan. Often, home loan modifications are triggered when a homeowner can no longer afford their monthly payments, due to problems such as job loss, illness, or other economic issues. A modification allows a homeowner to restructure the debt in a way that benefits them, such as:
- Extending the repayment term
- Moving missed payments to the back of the loan
- Rolling missed payments into the principal balance
- Reducing the interest rate
- Decreasing the principal owed
- Changing the interest structure from adjustable to fixed
How Does It Work?
Home loan modifications are often complex. The majority of homeowners are not initially approved for a loan modification, often because they have not provided the necessary information or responded to requests for additional information. Many mortgage service providers make this process unnecessarily difficult.
The process of obtaining a home loan modification varies by lender. However, the general process is:
- You contact the lender, explain your situation, and request a home loan modification.
- The lender sends you an application packet.
- You complete the application, document your hardship, and gather the documentation requested. You will probably have to submit proof of income and expenses, along with tax returns, pay stubs, monthly bills, billing statements, and information about assets you have.
- Show you meet other eligibility criteria.
- The lender approves or denies the application and notifies you.
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Advantages of Home Loan Modifications
There are a number of advantages of receiving a home loan modification, such as:
- You may be able to keep your home
- You might avoid foreclosure
- The impact on your credit may not be as severe as having a foreclosure or bankruptcy
- You may be able to make your monthly mortgage payment more affordable
- Disadvantages to Home Loan Modifications
- There are also a number of drawbacks of receiving a home loan modification, such as:
- The application process may be long and confusing
- You will have to assemble a ton of paperwork
- More affordable options may be available, such as seeking a refinance
- A home loan modification may be a temporary solution to a permanent problem of you not being able to afford the mortgage
- You may wind up paying more over the life of the loan, even with a reduced interest rate
Eligibility for Home Loan Modifications
Receiving a home loan modification often requires showing that you are one regular mortgage payment behind or that missing a payment is imminent. However, you will also need to be able to show that you will be able to afford to make the revised mortgage payments. Individual lenders and types of mortgage programs have additional criteria you will have to meet to be eligible for a home loan modification. For example, home loans that are backed by Fannie Mae or Freddie Mac require that the mortgage be at least one year old and applicants be delinquent on their payments or facing foreclosure.
Alternatives to Home Loan Modification
There are several alternatives to loan modification that may be available to you, depending on your circumstances. These alternatives may include:
- Refinancing: Refinancing involves obtaining a new mortgage loan, which may include a lower interest rate and/or a longer payment term. Funds from the new loan are used to pay off the original mortgage note.
- Forbearance: Forbearance refers to a temporary pause on a homeowner’s obligation to make monthly mortgage payments. Forbearance may be a more attractive option for a homeowner who has trouble making mortgage payments over a short, defined period but will be able to make their original monthly payments at the end of that period. However, interest typically continues to accrue during a forbearance period. Some homeowners opt to pursue a loan modification after the forbearance period.
- Short sale: If a homeowner cannot get approved for other options, they may be able to pursue a short sale. With this option, the homeowner sells the house for less than is owed on the loan. However, the homeowner may continue to be liable for any balance owed on the mortgage (although the lender may choose to forgive any remaining balance, with potential tax consequences).
- Deed in lieu: This option allows a homeowner to sign the house over to the mortgage provider so that the provider does not pursue foreclosure and tack on additional costs to the homeowner’s debt.
- Bankruptcy: Many homeowners who are behind on mortgage payments are also behind on other bills, credit cards, loans, and medical payments. Bankruptcy may be able to wipe out unsecured debt, which may be able to help homeowners dedicate more funds to paying off their mortgage if they want to keep the home. If they have decided not to keep the home, they can also pursue bankruptcy.
How a Knowledgeable Bankruptcy Lawyer Can Help
- Home loan modifications can be confusing and can have a lasting impact on you and your family. An experienced attorney can help you by:
- Reviewing your circumstances and determining if you qualify for a home loan modification
- Answering any questions you have
- Providing honest and straightforward feedback
- Assessing alternatives to home loan modification and explaining the pros and cons of each option
- Reviewing a home loan modification agreement
- Handling communication on your behalf
- Discussing whether bankruptcy may better address your financial needs
- Helping you determine the best course of action, based on your specific circumstances
Contact a Bankruptcy Lawyer Today
If you have questions about home loan modifications, bankruptcy, or other debt relief options, the knowledgeable bankruptcy attorneys at Warren & Migliaccio, L.L.P. are here to help. Contact us today to discuss your legal options.