Everyday our office hears stories of people concerned about their financial situation. Job loss, decreasing income or unexpected medical expenses have put them in a precarious situation. And the process of looking for assistance can be daunting, with little help provided by the lenders. This is especially true for the millions of homeowners who are affected by the coronavirus pandemic and struggling to meet their monthly mortgage obligations. What can be done to help? A loan modification. It is a change that the lender makes to the original terms of your mortgage, typically due to financial hardship. It is designed to provide relief to those who are financially stressed by modifying the terms of the loan to reduce the payment. The goal is to reduce the monthly payment to an affordable amount so the homeowner can stay in the home. This can be achieved in a variety of ways: reducing your interest rate, changing a variable interest rate to a fixed one, extending the term length or even a principal reduction of the balance of your loan.
A reduced payment & a chance to keep your home.
If you can reduce your monthly payment, it could be just the relief you need to pull through tough times. Banks prefer to avoid foreclosure because it's an expensive process. The best outcome for the homeowner and the bank is a loan modification to make continued payments possible. But you will need to prove your ability to pay the loan.
A mortgage modification, including the Flex Modification program for borrowers with a conventional loan owned by Fannie Mae or Freddie Mac, also adjusts the original terms of your loan to help make your mortgage payments more affordable. Borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac may be eligible for the Flex Modification program, which targets a 20% payment reduction. This could provide much-needed assistance during this critical time. The Fannie Mae and Freddie Mac Flex Modification program has several borrower requirements that apply to different circumstances, but below we list some of the general criteria. Flex modification program requirements include:
- Be in imminent default, which means you're expected to fall behind on your mortgage payments in the next 90 days, or already be 60 or more days delinquent.
- Have a mortgage that originated at least 12 months prior to the modification evaluation date.
- For borrowers in imminent default, the loan must be attached to their primary residence.
- Have a mortgage that hasn't been modified at least three times in the past.
- Have not failed a “Flex Modification Trial Period Plan” over the last 12 months.
Both the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) have mortgage modification programs for eligible borrowers.
The FHA loan modification program helps struggling homeowners by using one of the following options:
- Adding late payments to their principal balance.
- Extending their loan term.
- Lowering their interest rate.
- Reducing their outstanding balance by up to 30%.
Eligible borrowers must:
- Not qualify for other mortgage assistance programs.
- Have a DTI (debt to income) ratio of no more than 31% on the front end and 55% on the back end.
- Complete a three- to four-month trial, which depends on whether you're in default or imminent default.
How is a Loan Modified?
Through a lower interest rate: Your lender can also reduce your interest rates, which will reduce your required monthly payments. Sometimes these rate reductions are temporary, however, so read the details carefully and prepare yourself for the day when your interest rate might increase again.
Through an extended-term: You'll have more years to repay the debt with a longer-term loan, and this, too, will result in lower monthly payments. This option is commonly referred to as re-amortization.
Through a principal reduction: Your lender will eliminate a portion of your debt, allowing you to repay less than you originally borrowed. It will recalculate your monthly payments based on this decreased balance. This type of mortgage modification is usually the most difficult to qualify for, and lenders are typically reluctant to reduce the principal on loans. They're more eager to change other features which can result in more of a profit for them. If you're fortunate enough to get approved for a principal reduction, discuss the implications with a tax advisor before moving forward; you might owe taxes on the forgiven debt.
The loan modification process can be complicated and confusing. Unfortunately, your lender will provide little if any help applying for the assistance offered. And if you find yourself facing foreclosure, your court case will continue until the lender confirms that a complete loan modification application has been received. Don't go at it alone. Let us deal with your lender and their lawyers. At Holland Law Group, we help people navigate through the uncertainty by providing our years of experience and expertise to find solutions to their financial problems.