If you’ve fallen behind on your monthly mortgage payments, you may risk losing your home! Fortunately, there are several loan modification options you can rely on to modify the mortgage terms to make them more affordable. This provides homeowners with enough time to delay foreclosure, recover from their financial hardships, and catch up on their mortgage payments.
Keep reading to learn more about the different types of mortgage modifications and how they can help you keep your home.
What Is a Loan Modification?
Loan Modification refers to the adjustments made to the terms of your existing mortgage—either permanently or temporarily—to make monthly payments more affordable. This may involve extending your loan term, reducing your interest rate, switching from an adjustable-rate to a fixed-rate mortgage, or combining the three.
Mortgage modifications are highly beneficial to borrowers facing financial hardships. Most lenders also prefer this option as foreclosure can be an expensive procedure for them, especially if your property value is less than its loan value.
However, not all lenders offer loan modification, and those that do will have processes in place to assess what caused your financial hardship and whether loan modification will help make things more affordable for you or not. Depending on your financial and personal situation, you may be eligible for different types of loan modification, including government assistance programs.
An experienced attorney trained in all the significant types of mortgage modifications might be able to help you choose the best option for your situation and negotiate terms that are most beneficial to you.
5 Types of Loan Modification Options
Adjust the Loan Term
Getting a loan extension is how you can make your mortgage payments more affordable and keep your home. Though you will be paying more interest over your loan term, your monthly payments will go down, allowing you the time to recover from your current financial hardships.
Reduction of Interest Rate
Some lenders also offer loan modification programs that reduce the interest rates of your loan—either for the short-term or even for the entire life of the mortgage.
A short-term interest rate reduction is only valid for some time, after which you go back to your regular mortgage payments. This provides borrowers with enough time to get back on their feet financially and catch up on costs without losing their homes.
If your financial situation may not fully recover from affording the payments soon, lenders may offer reductions that can last the remaining lifespan of your loan.
The foreclosure process can not only be devastating for homeowners, but it is also a significant drain on the bank’s resources. This is why, in some cases, lenders might be willing to lower the amount you owe them.
Whether you qualify for principal modification depends on the current local housing market, how much you owe, and how much they would lose if they offered a principal reduction instead of if they chose the foreclosure route.
This type of loan modification was reasonably common in the years following the 2008 financial crisis when many American homeowners found themselves in danger of foreclosure as they owed mortgages that were more than their homes were worth.
Combining Late Fee with the Principal
Some lenders will add any past-due charges you have incurred on things like interest, late fees, or escrow to your principal balance and re-amortized your loan. Though you now owe more towards your principal, you can lower your monthly payments by extending the length of your loan.
Switch to a Fixed-Rate Mortgage
Though there are some cases in which an adjustable-rate mortgage may be more beneficial for you, it might be best to switch to a fixed-rate mortgage if your financial future looks a little unstable. ARMs are set up to have floating rates, i.e., they fluctuate with the market. For example, if you’re currently paying a 3.5% rate on your mortgage, and the average rate rises to 4.5%, you will have to pay more in monthly payments.
When you lock in your interest rates, you know you will pay the same interest rate every month, allowing you to better plan your finances. Even though switching to a fixed-rate mortgage plan will not lower your current monthly payments, it could potentially protect you from rising interest rates.
Government Mortgage Modification Programs
After the 2007–2010 housing crisis, several loan modification programs, including the House Affordable Modification Program (HAMP), were established to help struggling borrowers. Though HAMP ended in 2016, there are still several government-sponsored loan modification programs homeowners can rely on to avoid losing their homes. These include:
FHA Loan Modification
Current FHA loan borrowers are eligible for a partial claim of up to 30% of the unpaid principal balance and a loan modification, significantly reducing their monthly mortgage payments. Remember, you must be meet several eligibility criteria to qualify for the partial claim, including:
- The borrower must be at least 4–12 months behind on their mortgage payments.
- They should be currently living on the property.
- They should prove that they have the income to make the regular monthly payments.
Fannie Mae Flex Modification
The Fannie Mae Flex Modification program combines the Fannie Mae Home Affordable Modification, Standard Modification, and Streamlined Modification programs. Under this program, 90 or more days delinquent borrowers can get a 20% payment reduction without borrower documentation.
V.A. Loan Modification
If you have a V.A. loan you’re struggling to pay, the U.S. Department of Veterans Affairs offers mortgage delinquency counseling to help you figure out the best option. In addition, V.A. loan modification also allows you to add the overdue mortgage payments and related legal costs to your loan balance and set up a new mortgage payment schedule to catch up on payments and stay in your home.
A loan modification is a time-consuming process, but with professional help and advice, you may be able to uncover the best options for your unique circumstances and avoid foreclosure.
Talk to the Vilt Law, P.C. team if you’re looking for legal assistance in Houston or Chicago. We have years of experience helping borrowers modify their loans into terms favorable to them. Get in touch with us through our website or call us at (713) 840-7570.