Depending upon your unique situation, there are different modifications that you and your lender can make to the loan to change it into an arrangement with payments that you can afford and that will allow you to keep your home.
One possibility for a loan modification is a permanent change in the mortgage's interest rate. Loan modifications must result in fixed-rate loans. Another option is extending the number of years you as the borrower have to pay the mortgage, or the loan term, which can reduce monthly payments. The lender may also incorporate delinquent principal, interest, and escrow items into the unpaid balance. The type of mortgage may be changed, or aspects from various amendment options may be combined. Because there are so many options for modifying your mortgage, the changes can be precisely tailored to your circumstances.
Situations for Loan Modification
When you are deciding what alternative to avoiding foreclosure you will pursue, the first step is to assess your situation carefully. Ask yourself why you are having trouble making your current mortgage payments. Are you currently unemployed or experiencing other circumstantial financial difficulties? If your problems with repayment are temporary, a forbearance agreement may be a better option than modifying your mortgage. Has an adjustment to a higher interest rate caused your monthly payment requirements to become unmanageable, and you know you will never be able to meet these payment amounts? This situation is a long-term problem, and loan modification may be a good alternative to foreclosure.
Once you have decided that loan modification is the option you want to pursue to avoid foreclosure on your home, use the information you discovered in your personal assessment to be prepared to discuss options for modifications with your lender. Would extending the term of the mortgage suit your needs best? Would capitalizing delinquent amounts be ideal for you? Knowing exactly what your financial circumstances are will enable you to be ready to discuss your options with your lender, both to achieve the arrangement that will best fit your needs and effectively to convince your lender to help you avoid foreclosure by cooperating in modifying your mortgage.
Why Your Lender May Agree to Loan Modification
Lenders are not generally under any obligation to help you avoid foreclosure by agreeing to modify your mortgage, and, as loan modifications usually result in lower interest costs to the borrower, it may seem that a lender has no motivation to cooperate. However, modifying mortgages is becoming more common. In short, your lender may be motivated to modify your mortgage if the costs they will incur by changing the agreement will be less than the costs to them if you default on the existing loan.
While your lender might not be keen on the idea of lowering your interest rate, for example, it most likely doesn't do them any good to go through a full foreclosure and have to remove you from your home either. In the end, it's generally in their best interest to cooperate as much as possible with you as the borrower. Additionally, you have other options available to deal with your mortgage, such as refinancing. If you choose to refinance with another lender, your current lender loses out on the revenue they can get from your interest payments and servicing fees.
Advantages to Modifying a Mortgage
Loan modification is different than refinancing because modification does not involve the creation of an entirely new loan, but rather a change in the terms of the existing mortgage. Therefore, one of the benefits of loan modification as opposed to refinancing is that you will not have to go through a new closing. In this way, you may be able to avoid many of the legal fees, appraisals, surveys, and taxes associated with the closing that you would certainly have to go through with the creation of a new loan through mortgage refinancing.
Eligibility Requirements
Before beginning the process of modifying your mortgage, you must have met some basic requirements in order to be eligible for loan modification.
- The property under the mortgage must be your primary residence.
- Your current mortgage may not be in foreclosure.
- At least twelve months must have elapsed since the origination date of your mortgage.
- You must be at least three full payments behind.
- You may not have another FHA-insured loan.
- Your default must be because of an increase in your living expenses or a loss of income, either of which needs to be verifiable.
Check with your lender for additional eligibility requirements.
The Loan Modification Process
Generally, to begin modifying your mortgage, your lender will thoroughly assess your financial situation. The lender will examine your income and expenses to be certain that you will be able to meet the requirement of the newly modified loan. Your lender may also assess the physical state of your property. Serious defects in the condition of your home may cause the lender to avoid modifying your mortgage. If repairs are needed, these costs cannot be incorporated into the costs of your loan modification.
The core of the loan modification process is coming to an agreement with your lender upon which terms will be changed and how to change them. If you know what your needs are going into the process, you will be in a good position to end up with a modified mortgage that you can afford and that will allow you to avoid foreclosure and stay in your home.