When Should You Refinance
Lets take a look at a couple of times when it makes sense to take a refinance over a modification.
- Youre not underwater on your loan.Though there are special refinance programs that can help you adjust the terms of an underwater loan, refinancing is much easier when you have equity.
- You want to take cash out of your home equity. You can take cash out of your home equity to cover outside bills if you meet equity standards. This isnt possible with a loan modification.
Types Of Loan Modifications
There are two kinds of loan modifications typically offered, according to Charles Gallagher, an attorney and partner at St. Petersburg, Florida-based Gallagher & Associates Law Firm, P.A., which represented several clients in foreclosure who recently sued Caliber Home Loans over its loan modification practices.
Its essential to understand the terms of a loan modification, including what your new payments are going to be, if the changes are temporary or permanent and what the long-term implications are as far as overall loan cost, Sharga says.
Failing To Process The Application In A Timely Manner
Many homeowners have experienced lengthy delays when waiting for the servicer to decide whether to grant a loan modification. In some cases, the servicer doesn’t tell the homeowners that they’re missing documents necessary for the loan modification decision. In others, the servicer simply doesn’t get around to reviewing the request promptly.
Federal mortgage servicing laws, effective January 10, 2014, aim to reduce these delays. Under these laws, when a servicer receives a loan modification application from a homeowner 45 days or more before a foreclosure sale, it must:
- review the application
- determine if the application is complete or incomplete, and
- notify the borrower within five days stating that the application is complete or incomplete.
If the servicer receives a complete application more than 37 days before a foreclosure sale, it must review the application and determine if the borrower qualifies for a loan modification within 30 days. However, the servicer generally doesn’t have to look at multiple loss mitigation applications from you. But if you bring the loan current after applying for loss mitigation, you may apply again.
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How Forbearance Agreements Work
A forbearance agreement provides short-term relief for borrowers. With a forbearance, the lender agrees to reduce or suspend mortgage payments for a while. During the forbearance period, the servicer won’t initiate a foreclosure. In exchange, the borrower has to resume making payments at the end of the forbearance period, and typically get current on the missed payments, including principal, interest, taxes, and insurance. You can usually:
- pay the amount in a lump sum
- add an extra amount to your regular payments each month until the entire skipped amount is repaid, or
- complete a loan modification in which the lender adds the unpaid amounts to the balance of the loan.
The specific terms of a forbearance agreement will vary from lender to lender.
Refinancing Should Not Affect Credit
If you simply refinance your mortgage at a lower rate to reduce your monthly payments, you shouldn’t have any negative credit impacts at all. Refinancing your mortgage is basically paying off your existing mortgage by taking out a new one, so there’s nothing negative to report. In fact, you’ll need good credit to refinance your mortgage in the first place.
One place a mortgage refinance might have a negative impact is if you try to take out another large loan, such as a car or boat purchase, within a few months of refinancing. Since the refinance is a new major loan, lenders may look askance at you seeking to take out another so soon, even though you’ve actually reduced your debt obligations.
Another way a refinance might damage your credit is if you do a short refinance. In this situation, your home has lost value and the lender agrees to write down the principal and issue you a new loan. You’re basically doing a short sale to yourself. This is typically a difficult arrangement to obtain, although in the current market environment, lenders may be more accommodating than in the past. Still, it’s going to show up on your credit score as a debt writeoff for the next seven years.
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Mortgage Modification Vs Refinance
A mortgage modification program allows you to modify your mortgage, as the name suggests. Your lender changes the original terms of your mortgage by extending your loan term or reducing your mortgage rate, for example but you keep the same loan.
On the other hand, a mortgage refinance involves replacing your existing mortgage with a new loan that has better terms, such as a lower mortgage rate and monthly payment or a more stable loan type, such as switching from an adjustable-rate to a fixed-rate mortgage.
How did HAMP differ from HARP?
Another government-backed program, Home Affordable Refinance Program , was created to help mortgage borrowers who were underwater on their loans meaning they owed more than what their house is worth to refinance their mortgage. That program expired in 2018.
Unlike HARP, HAMP didnt provide borrowers the opportunity to refinance. Instead, they were able to modify their loan and receive smaller monthly payments, providing them with a mortgage that was more affordable and sustainable without going through the refinance process.
Mortgage Loan Modification Faq
What happens when you get a loan modification?
The goal of a loan modification is to help a homeowner catch up on missed mortgage payments and avoid foreclosure. If your servicer or lender agrees to a mortgage loan modification, it may result in lowering your monthly payment, extending or shortening your loans term, or decreasing the interest rate you pay.
How do I get a mortgage loan modification?
Contact your mortgage servicer or lender immediately to alert them of your financial hardship and ask about loan modification options available. Be ready to provide all documentation requested, which can include financial statements, pay stubs, tax returns, and more.
How long does loan modification last?
Expect your loan modification process to take anywhere from one to three months, according to finance and insurance expert Karen Condor. Once your loan modification has been approved, the changes to your interest rate and/or loan terms are permanent.
Does loan modification hurt your credit?
A mortgage loan modification under certain government programs will not affect your credit. But other loan modifications may negatively impact your credit and show up on your credit report. However, since your mortgage usually must be in default to request a modification, your financial difficulties are probably already on your credit report, explains attorney Elizabeth Whitman.
Can you be denied a loan modification?How much does mortgage modification cost?
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Fannie Mae/freddie Mac Plan
In the task at hand to make headway against foreclosures and the depressed housing market. Fannie Mae and Freddie Mac entered a new phase on December 9, 2008 for a fast-track program meant to make “hundreds of thousands of mortgages affordable to people who can’t currently meet their monthly payments.”
Through the SMP, servicers may change the terms of a loan to reduce a borrower’s first lien monthly mortgage payment, including taxes, insurance and homeowners association payments, to an amount equal to 38 percent of gross monthly income. The changes in terms may include one or more of the following:
How Long After A Loan Modification Can I Buy Another House
In most cases, you can get a mortgage to buy another house after a loan modification as long as you havenât missed any payments over the previous 12 months, depending on the specifications of your lender. But you need to know how your original loan was modified. If you had any principal balance forgiveness or âwrite-downâ on your mortgage, you may not qualify for a conventional mortgage loan. But there are other ways to get a mortgage with a low credit score.
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Loan Modification Vs Forbearance
Forbearance is another way servicers can help borrowers during times of financial stress.
Loan forbearance is a temporary plan that pauses mortgage payments while a homeowner gets back on their feet.
For example, many homeowners who lost their jobs or had reduced income were able to request forbearance for up to a year or more during the COVID pandemic.
Unlike forbearance, mortgage loan modification is a permanent plan that changes the rate or terms of a home loan.
Forbearance and loan modification can sometimes be combined to make a more effective mortgage relief plan.
For instance, a homeowner whose income is still reduced at the end of their forbearance period may be approved for a permanent loan modification.
Or, a homeowner approved for mortgage modification may also have part of their unpaid principal forborne until the end of the repayment period.
Mortgage Loan Modification Programs
Your loan modification options will depend on the type of loan you have and what your lender or loan servicer agrees to.
Conventional loan modification
Fannie Mae, Freddie Mac, and private lenders of conventional loans have their own modification programs and guidelines, says Charles Gallagher, a real estate attorney.
In particular, Freddie Mac and Fannie Mae offer Flex Modification programs designed to decrease a qualified borrowers mortgage payment by about 20%.
Flex Modification typically involves adjusting the interest rate, forbearing a portion of the principal balance, or extending the loans term to make monthly payments more affordable for the homeowner.
To be eligible for a Flex Modification program, the homeowner must have:
- At least 3 monthly payments past due on a primary residence, second home, or investment property
- Or less than 3 monthly payments past due but the loan is in imminent default, meaning the lender has determined the loan will definitely default without modification. This is only an option for primary residences
Certain hardships can trigger imminent default status for instance, the death of a primary wage earner in the household, or serious illness or disability of the borrower.
Unemployment is typically not an eligible reason for Flex Modification.
In addition, governmentbacked FHA, VA, and USDA loans are not eligible for Flex Modification programs.
FHA loan modification
VA loan modification
USDA loan modification
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Refinancing And Other Alternatives To Modification
Loan modification isnt your only option, thankfully.
Possible alternatives include refinancing, forbearance, a deedinlieu of foreclosure, or Chapter 13 bankruptcy.
As mentioned above, you should first check if youre eligible to lower your interest rate and payment with a mortgage refinance.
Youll have to qualify for the new mortgage based on your:
- Debttoincome ratio
- Loantovalue ratio
- Income and employment
It may be difficult to qualify for a refinance during times of financial hardship. But before writing this strategy off, check all the loan options available.
For instance, FHA loans have lower credit score requirements and allow higher debttoincome ratios than conventional loans. So it may be easier to refinance into an FHA loan than a conventional one.
Homeowners with FHA, VA, and USDA loans have an additional option in the form of Streamline Refinancing.
A Streamline Refinance typically does not require income or employment verification, or a new home appraisal. Even the credit check might be waived .
These loans are a lot more forgiving for homeowners whose finances have taken a downturn.
Note, Streamline Refinancing is only allowed within the same loan program: FHAtoFHA, VAtoVA, or USDAtoUSDA.
Other mortgage relief options
Refinancing typically requires a loantovalue ratio of 97% or lower, meaning the homeowner has at least 3% equity.
What should you do?
Applying For A Mortgage Loan Modification
A mortgage loan modification application will require the details of a borrower’s financial information, the mortgage information, and the specifics of the hardship situation.
Each program will have its own qualifications and requirements. These are typically based on the amount the borrower owes, the property being used for collateral, and specific features of the collateral property.
If a borrower is approved, the approval will include an offer with new loan modification terms.
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Hope For Homeowners Plan /fha
The HOPE for Homeowners Act Program is effective for endorsements on or after October 1, 2008, through September 30, 2011.
- Affordability versus value: lenders will take a loss on the difference between the existing obligations and the new loan, which is set at 96.5 percent of current appraised value. The lender may choose to provide homeowners with an affordable monthly mortgage payment through a loan modification rather than accepting the losses associated with declining property values.
- Borrower eligibility: Lenders that determine the H4H program is a feasible and effective option for mitigating losses will assess the homeowner’s eligibility for the program:
Answers To Questions About New Mortgage Modification Program
6:30 p.m. | Updated to add new detail and questions and answers The federal government announced new initiatives on Friday to help people who are having trouble paying their mortgages. Here are some questions and answers about the efforts.
I am currently unemployed. What sort of mortgage payment reduction can I qualify for?
The company servicing your mortgage will be required to offer at least three, and up to six, months of reduced payments. During that time, you wont have to pay more than 31 percent of your monthly income toward the mortgage.
You have to live in the home to qualify, and the mortgage balance has to be less than $729,750, with a monthly payment that represents more than 31 percent of the gross monthly income of all borrowers who signed your mortgage, before you subtract anything for taxes or deductions. If one person in the household works and one is unemployed, you will not be eligible if the loan payment is under 31 percent of your current total household income.
Also, you need to prove that you are receiving unemployment benefits and ask for help within 90 days of any late payments.
The lowered payments would revert to the regular amounts once you got a job, if you became employed before the three- to six-month period ended.
Im underwater, since my mortgage is for more than my home is worth. What sort of help might I get from my mortgage company?
But banks are not required to participate.
Who decides how much my home is worth and how?
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Not Reviewing An Application Or Failing To Honor A Modification Agreement After A Servicing Transfer
Servicing transfers often happen in the mortgage industry. In some cases, the new servicer fails to review an already submitted loss mitigation application or fails to honor a modification agreement with the previous servicer.
Under federal law, if a complete loss mitigation application is pending at the time of a servicing transfer but hasn’t been evaluated, the new servicer has to review the application within 30 days of the transfer date. Also, a servicing transfer shouldn’t affect a borrower’s ability to accept or reject a loss mitigation option offered by the prior servicer. If a new servicer comes into the picture and the time frame for accepting or rejecting a loss mitigation option offered by the old servicer hasn’t expired as of the transfer date, the new servicer must allow the borrower to accept or reject the offer during the unexpired balance of the applicable time period.
What Does It Mean To Refinance Your Mortgage
You replace your existing loan with a new mortgage when you refinance. This allows you to change the terms of your loan. You can also use your equity to take cash out of your home. You might want to refinance to:
- Lengthen your mortgage term. You lower your monthly mortgage payment when you refinance to a longer mortgage term. This can help you avoid foreclosure if your income is now lower than when you got your loan.
- Shorten your term. You can also shorten your mortgage term with a refinance. Your monthly payment increases when you shorten your term. However, you own your home sooner and save money over time in interest.
- Take a lower interest rate. A refinance can help you lock in a lower rate if interest rates are lower now than when you got your loan.
- Change your loan type. It might be beneficial to refinance to a new loan type if you have more than 20% equity in your home. For example, if you have an FHA loan, youll pay for mortgage insurance throughout the life of the loan if you put less than 10% down. However, you can cancel private mortgage insurance on a conventional loan as soon as you reach 20% equity. Many homeowners refinance their FHA loan to a conventional loan after they achieve 20% equity for this same reason.
Unlike a loan modification, you dont need to refinance with your current lender. Unsatisfied with your lender? A refinance can allow you to switch to a new lenders system.
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