What is a Mortgage Modification?
A mortgage modification is an action carried out by a homeowner to change the terms of the mortgage for their home. This is typically done in order to either obtain lower monthly payments on the loan or, in some cases, to reduce the interest rate on the loan. However, not every mortgage can be modified by the lender.
For instance, government-backed mortgages typically cannot be modified by the lender because the lender is not the true owner of the loan. The government who backs the loan may modify it, but the lender cannot do so. If you have a conventional loan with a bank or a credit union and have been struggling to keep up with the monthly payments, applicable to your situation may be a loan modification or solution. It is an option that is available, and its acceptance by the lender could help the homeowner stay in his or her home .
Obtaining a modification is different from refinancing a mortgage in that refinancing involves obtaining a new mortgage from a lender by paying off your existing loan, rather than keeping your existing loan, which is restructured to a lower interest rate. Refinancing also involves other elements: a new loan term, potential for points, and a new loan origination. Of course, you are issued a new mortgage document when the refinance occurs, which is not the case with a modification.
Sometimes, a modification will involve lowering the interest rate, but it will not result in a new mortgage loan. The existing mortgage simply is modified to lower the monthly payment for the borrower. There are no other costs or fees involved. In some cases, other options may be available to homeowners, including obtaining a new fixed-rate mortgage that can guarantee a lower monthly payment over the long term, or a Home Equity Line of Credit (HELOC) under which a second mortgage secures the mortgage with the lender.
Why Would You Want to Modify Your Mortgage?
The reasons to consider a modification of your mortgage are many. You should be considering a possible modification if you are facing a financial hardship and cannot afford the monthly payments that are due. It is possible to lower your interest rate which will help make your monthly payments more affordable. If your current interest rate is an adjustable rate, you may have the opportunity to lock in a fixed rate. You may also owe more on your mortgage than your home is worth. Many times a modification is possible even if you have little or no income.
Parts of a Sample Mortgage Modification Agreement
The components of a sample mortgage modification agreement document the specifics of your modern mortgage. Most common are the new interest rates, payment schedules, any fees, and penalties that are included in the agreement. The following are some of the major components today’s mortgage modification agreements contain.
Together with the sample mortgage modification agreement, you should have received a statement from your loan servicer detailing the specific changes to your loan that have resulted from the mortgage modification. The new interest rates or the reduction of interest rates is most frequently documented. The mortgage modification may allow for changes between fixed and variable interest rates, the cap on such variable rates, and the maximum that interest can increase over the life of the mortgage.
Examples of the changes to your payment schedule are the frequency of payments, the amount of principal and/or interest to be paid each period and the due date of the first payment.
The fees and/or penalties for non-compliance with the mortgage modification could include any one or more of the following: a one-time charge; a late payment charge based on a fixed or set percentage of your payment; an increase in the regular rate of interest of your mortgage resulting from a late payment; collection charges or lender attorney fees for attempted collections; fees for documenting the mortgage modification; and/or even higher interest payments from a variable rate increase based on the missed principal or interest payments.
How to Apply for a Mortgage Modification
If you have discovered that your home is facing foreclosure because you have fallen behind on your mortgage payments, you should consider requesting a modification of the terms of your mortgage agreement. But how exactly should you accept these terms?
There are specific steps a homeowner must take in order to apply for a modification of their mortgage loan. Those include:
Step 1: The first step in applying for a loan modification is to contact your lender. Ask your lender about their specific requirements for modification. Not all lenders have the same requirements, and knowing what your lender expects can save you an enormous amount of time and effort during this process.
Step 2: Once you contact your lender and inquire about their requirements, you’ll want to gather all documents you will need in order to specifically request a modification of your mortgage. It is critical to keep your own copies of all paperwork, as you desperately need it to succeed in a loan modification.
Necessary documents usually include:
Take note that some lenders may require additional paperwork, and you should always ensure you have copies of all information you give to your lender.
- Submit paperwork to your lender. Even if you are unsure if something is required or not, it is always better to submit too much information than too little.
- With this paperwork, you may be placed on a Trial Payment Plan. A big advantage to having your lender add you to this plan is that it will take away the majority of the financial pressures you are struggling with daily.
- After successfully finishing this plan, your lender may offer you a permanent modification plan. Although not always, this plan is generally much more affordable than your current plan. You’ll want to keep careful track of your payments at this time, making sure to adjust for any changes in your budget or finances.
All lenders are required to send you a letter notifying you whether they’ve accepted or rejected your loan modification application. Once you receive this, you’ll want to get a copy for your CMS file and, if applicable, consult with a Los Angeles bankruptcy attorney as well.
If your lender has rejected your loan modification application, ask them why. It may be a simple fix that your lender can provide to you almost immediately. If the reason your application was rejected is something more major, an attorney should be able to provide some legal options you could pursue.
Legal Issues and Tips
In the throes of the foreclosure crisis, there are a multitude of websites offering sample mortgage modification agreements that seem… too good to be true. These forms, however, may not be a good fit for your situation and may contain provision that could harm you financially. Legal advice is always recommended with any real estate purchase and sale but such advice is especially necessary when it comes to foreclosure and loan modifications. Working with an attorney to obtain a loan modification could mean the difference between keeping your home or losing it.
Consider borrowing money from a friend or family member because the interest rate may be lower and there may be less of a chance of being sued for foreclosure. What happens when you don’t make a payment on time to your friend or family member? Well, your family member can always put family matters aside and sue you to foreclose on the loan or get a judgment against you. Now how awkward would that be at Thanksgiving Dinner?
If your mortgage company does not pay the property taxes on your home, they will get that money before they pay you back, even if you have overpaid them. If the mortgage company goes bankrupt you are out of luck unless you sue for the amount that you overpaid, which means that you will have to foot the bill for the filing fees and attorney’s fees involved in suing someone who just went bankrupt .
When a mortgage company pays your property tax bill that you unwittingly overpaid, the mortgage company gets all of their money even though you might be in foreclosure proceedings. You are now stuck paying property taxes regardless of the status of your foreclosure process-again. That’s right, twice.
If a loan modification agreement isn’t approved, you will have to pay off the loan at once-meaning that you will have to obtain a new loan to pay off the other loan or you will have to pay the entire loan right away. There are few lenders who will lend to those who have a loan modification agreement in process, additionally the closing costs and attorney’s fees associated with obtaining a new loan can be very cost prohibitive.
There are differences in state law on loan modification-such as Massachusetts law requiring the mortgage company to reasonably explore one or more loan modification options before it can foreclose on a home.
A loan modification opportunity can be a blessing to a homeowner who has run into trouble paying his or her mortgage due to a job loss, increase in expenses or a decrease in income. It can, however, also be a curse that leaves a homeowner with unexpected and significant financial burdens. Working with an experienced attorney in foreclosure matters could ease some of the risks of obtaining a loan modification.
Real Life Cases & Success Stories
In 2012, New Jersey’s foreclosure crisis peaked, with the state second in the nation in filings. In 2013, though, the rate of foreclosures slowed significantly — due in part to the successful transformation of the NJHMFA’s HomeKeeper program to a new foreclosure mediation program designed to help struggling homeowners in monetary distress. This is an excellent example of how mediation programs helped avoid foreclosure in a time of crisis. Recognizing the financial and emotional devastation of foreclosure, mediators were able to help many homeowners who did and still do face foreclosure. Under this program a home owner can request a settlement conference with a representative of their lender. Since much of the mediation focuses on the terms of potential modification, the home-owner can avoid foreclosure through negotiating a new payment plan with lower terms. As a result, thousands of loans were made affordable for NJ homeowners.
About 450 homeowners facing foreclosure filed petitions in Bergen, Essex and Morris counties between March 15 and May 31 this year, according to the New Jersey Judiciary. Of those, an estimated 159 homes were retained in the mediation program while more than 80 households found some form of foreclosure relief. A year out of the 1,050 cases that were referred to mediation in Camden, Cape May, Cumberland and Salem counties in 2013, 173 (or 15 percent) were able to restructure a mortgage or financial obligation that may have led to foreclosure. Another 20 percent of those cases were settled in some other way, such as a short sale, which may also help to avoid foreclosure.
The likelihood that homeowners will obtain loan modifications through the mediation process will continue to increase. The increase in the number of loans that are able to be modified are in direct proportion to the availability of options under foreclosure mediation programs. More and more loan services are participating in the mediation programs because it brings settlement negotiation to the forefront. Negotiations that take place during the mediation process make it easier for homeowners not only to restructure their loans but also to obtain any losses or debts that may be owed from their lender, including the successful recovery of over $5 million paid to the State of New Jersey for abusive lending practices.
Cautions and Disadvantages
There are some potential drawbacks and challenges to modifying a mortgage that you should consider in your thought process about a workout. Some are specific to your situation or the current real estate climate, while some are universal.
You still may incur a higher interest rate, depending on market conditions. A higher interest rate can lead to a higher monthly mortgage payment and higher overall payments than you were paying before. Of course, maybe the new loan’s payments are more manageable than payments on the previous loan. While you may have attained a lower monthly payment with a loan modification, the new loan may have a shorter loan term than your previous mortgage. Thus, you may be required to pay off the loan in a shorter period of time.
If you are on the hook for a deficiency judgment in your state, a loan modification may not eliminate that obligation. You may get a fresh start, but not always completely. The foreclosure of your second car may just not be enough to keep you from defaulting on your new loan. Some states allow homeowners to keep their homes only if they can afford the new payments. Those states do not take into account appreciation in value or obtain an equity cushion. As a result, home values in a few states hold true to their original value, or even decrease in value.
Most lenders will agree to a loan modification only if you agree to a short sale, short payoff or deed in lieu. This is especially true if your home has less equity than the lender holds in the mortgage. If you stop making payments and your lender will not agree to a loan modification, you could face foreclosure, which could lead to a deficiency.
Keeping in mind that it is possible to negotiate a loan modification and challenge your lender, the best loan modification strategy will be one coordinated with negotiation and settlement of any second mortgages or home equity lines of credit (i.e., liens) and/or your complete financial situation. A comprehensive approach to negotiating a loan modification can prevent future litigation. If required, you can agree to modify the first mortgage to either conform to the second mortgage or include the second mortgage, rather than separating the two.
Questions & Answers
While the above section will answer the most common questions people have, there are always some other questions along with some concern over the modification agreement provided by the lender.
Question 1: What do the three boxes on the left side of the mortgage modification agreement mean? The first box is essentially the amount of the new monthly payment due. This is the regular monthly mortgage payment that would be paid going forward. The second box refers to any amount that is past-due from the mortgage. Your lender may agree to put any past-due amount in forbearance which means they will not collect it at that point, but if you default in the future, they will assume they can collect on the forbearance. The last box refers to amounts that go into escrow. When you don’t use the money collected for taxes and insurance in the escrow account, and apply it towards the mortgage principal and interest , your lender now has the option of applying that money towards the balance owed.
Question 2: My loan was written as a 30 year mortgage. Why is the new term 40 years? You are not getting 40 years on the mortgage contract. Since you have missed a substantial number of payments, it is better to extend the life of the mortgage so your monthly payments are lower. This does not increase the total amount of the mortgage.
Question 3: I have made all my payments, but I am being modified anyhow, why? The lender may want to modify your account because they see the opportunity to take a loss on the mortgage, by doing so, and getting the title to sell the home. They may want the opportunity to create a more manageable payment for you, especially if you had issues in the past that were solved with the modification.
Question 4: How long will I be on a trial period? The trial period is the period where your lender takes a look at whether you can afford to keep making the payment before modifying the mortgage to the new terms. This period is just twenty (20) days. After that, they will send you a notice to sign the loan modification agreement.