FAQ - Mod vs Refi
Updated: Jan 13, 2022
A loan modification is the permanent restructuring of the mortgage where one or more of the terms of a borrower's loan are changed to provide a more affordable payment. With a loan modification, the Lender / Servicer may agree to modify your interest rate, principal balance, original loan term and amortization schedule to achieve favorable terms and an a more affordable monthly payment. The purpose of a loan modification is not only to bring your loan current and avoid foreclosure, but to provide a more affordable payment in accordance to your "present gross household income". The targeted range for a proposed modified payment is generally 31% of one's combined gross monthly income. (i.e.) If a borrower earns a $60,000 annual salary ($5,000 / month) their newly proposed monthly payment will be $1,550 with Escrows included. Loan modifications should be one's first choice before considering selling or filing for Bankruptcy. If a legitimate hardship is in place most lenders will 100% accept any requests for Mortgage Assistance and seek to allow the homeowner to keep their property. Also, contrary to general assumptions, one does not have to be delinquent or behind on payments to apply or qualify. Most lenders / servicers consider "Imminent Default" sufficient to accept applications for mortgage assistance. (i.e.) If one is notified he/she will be laid off in the near future and that impacts their overall financial circumstances, there's absolutely no reason to wait until the point of no return occurs to apply.
Do Loan Modifications Hurt My Credit?
May be reported as a debt settlement. Lenders will often report a loan modification to credit bureaus as a type of settlement or adjustment to the terms of the loan... In this case, your credit rating could even improve, because your monthly payment would be reported as decreased.
Can You Still Apply for a Loan Modification if you've been Foreclosed on?
The short answer is it depends on the state. If the state provides a legal "Right of Redemption" then it may be possible to litigate and reverse the foreclosure. Although, it's generally only possible if the lender's proven to be at fault. Also, keep in mind that it is also possible to be in foreclose during a loan modification process. However, the property should never go to auction if there's a complete request for Mortgage Assistance in process. Your Lender / Servicer will always look into mortgage assistance options prior to executing a foreclosure. In most cases they generally require a complete application in 14 days prior to a set auction date in order to postpone a set auction or cancel foreclosure proceedings altogether. Again, keep in mind it's not always 100% guaranteed.
What is the difference between a Loan Modification and Refinancing?
Understanding the differences. A refinance replaces the existing mortgage with a new loan with a new rate, and/or more favorable terms, such as a fixed rate loan versus an adjustable one. In a loan modification, the original lender is doing the modifying, restructuring the original note. Opposed to switching lenders or investor the borrower would renegotiate terms directly with their current lender / servicer.
Is a Loan Modification Permanent?
For homeowners who do qualify for a proposed loan modification, there is generally a three-month trial period. (Depending on the proposed offer) You get a modified home loan payment for 90 days (3 months), with a new interest rate and payment level. Before you can be fully approved for a "permanent" loan modification agreement you must make all payments on time during the trial period. This essentially coincides with proving affordability to qualify. One must prove they can afford the proposed modified payment in order to finalize said terms.