Home Loan Modification
Modify Your Home Loan To Better Suit Your Current Needs
When you first apply for a home loan you may have a five year plan, or an idea of where you’d like to be in 10 years time. However, thinking 30 years into the future can be difficult, not only because your goals for that far ahead are harder to define, but also because you don’t know what is going to happen in your life which will be outside of your control. While it is all very well to try and expect (and plan for) the unexpected, by its nature these unexpected events could be anything.
That is why the chances are good, that at some time during your mortgage term, you will need to modify your home loan structure. This modification could include changing any original feature of your loan contract, from the repayments, the amount, the term or the interest rate. Any home loan can be modified if you work with the right home loan lender because there are people out there who understand how big this investment really is, and how important it is to get it right.
What is mortgage modification
Normally when you are repaying a mortgage your repayments are made up of an interest and a principal portion, which you pay until you have repaid the borrowed amount in full. Until you repay your mortgage in full, your lender holds security over your property so if you decide to sell your home before the mortgage is repaid, some of the sale price will have to go back to your lender to cover the unpaid loan amount.
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Normally a mortgage modification occurs when you are unable to meet your current repayment amounts and the modification can see a different monthly repayment, interest rate or term being applied to your mortgage to make it more affordable for you into the future. If you are struggling with your mortgage and you choose mortgage modification to help you out, you will have:
- Late fees on repayments waived.
- A new interest rate applied to your loan.
- Not be charged a foreclosure fee.
- A new loan term.
- A new tenure status.
While being able to modify your loan in this way to make it more affordable may sound too good to be true, your lender would actually lose more money if they had to take possession of your home when you defaulted on your repayments. For example, if your bank has to sell your house, they are likely to make a loss because they want to sell quickly. As a result, they may secure a price which covers only a fraction of the remainder of you loan.
Plus when a bank forecloses on a property they are also required to set aside in escrow, a foreclosure penalty which is equal to six times the loan amount. This money in escrow goes into a vault and is not able to earn the bank any interest until the property is sold. As a result, if the bank lets you modify your home loan to lower repayments or a lower interest rate, they are at least getting back some of their loan amount, and make a smaller loss.
Most types of home loans can be modified but your lender or mortgage broker will be able to tell you before beginning the modification process if you are eligible.
Types of Home Loan Modification
If you are finding your home loan hard to manage, there are a number of ways it can be modified to fit better into your budget or changed financial circumstances. Your loan can be modified in one or more of these ways:
- You can be charged a lower interest rate, so your repayments become lower.
- You can be changed from a variable to a fixed interest rate, or have the calculations of your floating variable rate changed.
- Your principal loan amount can be reduced.
- Late fees and penalties can be removed and no longer payable.
- Your loan term can be extended so while you will pay more in the long term, your repayments are lower now.
- Your monthly repayment can be capped at a percentage of your household income so it remains within your budget.
- A mortgage forbearance plan may be applied to your loan where your repayments are reduced or suspended for a period of time if you are going through tough financial times.
A mortgage modification can be voluntarily applied by your lender because it is more beneficial for them than foreclosing on your loan, or the state and federal government may structure a mandatory mortgage modification which will require the lender to modify your loan to meet your changed needs.
When you modify your mortgage, you are getting a fresh start in repaying your home loan and your account is brought up to date.
Steps to Home Loan Modification
Before your modified home loan is put in place, the negotiations regarding which modifications will be applied can take up to 90 days for a standard lender. In some cases, federal government stimulus plans to help combat the effects of the Global Financial Crisis mean that most loans can be modified within 45 days at the most.
That means that during the home loan modification process, you may still receive requests for payment from your lender. However, if you are able to propose a reasonable modification to your lender, you have a good chance of being accepted, as foreclosing on a property is not in the best interests of the lender either.
While you may need to make counter offers to your lender to have your home loan modification approved, to help ensure success, you will need to follow these steps:
- Letter of hardship. You will first need to send a detailed letter of hardship to your lender detailing your situation and the steps you have already taken to try and regain control over your mortgage repayments. You should also provide proof of the steps you have taken, whether you have applied for a second job, tried to consolidate other debts or borrowed money from family.
- Be honest. Lying on your home loan modification application will be spotted and will lead to a refusal for modification. The lending company processing the modification will run a series of checks on you and your financial situation, so be honest from the beginning about your income, your properties and your other debts.
- Complete the application within the guidelines. You must complete all parts of the home loan modification application forms according to their guidelines to ensure your application is considered.
- Organise your finances. Make sure you have all the documents for your loan application, as well as bank statements, tax returns and your credit card history filed together so you can provide as much information in your application as possible.
- Show your complete financial status. When you prepare a financial worksheet as part of your application you will be able to show your complete current and proposed financial status.
- Follow up your application. Until your home loan modification is approved, your loan may still be in default, or still causing your financial stress. Therefore, keep track of the status of your file to make sure it is processed as quickly as possible.
- You could be eligible for modification. If you are struggling with your loan, consider home loan modification as an option, as the eligibility criteria are no longer restricted to those who have lost their job, been through divorce or suffered an illness. Therefore, it is worth finding out if there is a better way to manage your mortgage if you are having difficulty for any reason.
Benefits of Home Loan Modification
Money is one of the most common causes of stress and if you are worried about having enough money to pay your mortgage, then the added stress of losing your home is reason enough to consider some of the many other benefits of modifying your mortgage:
- Avoid foreclosure. If you are suffering financially then all of your bills are probably paid late. However, when you are unable to pay your mortgage for months on end, your lender wants to get their money in some way, and so will threaten you with foreclosure, where they sell your home to cover the outstanding amount of your loan – while your home loan is effectively repaid, you are now without a place to live.
- Provide security for your family. Your mortgage repayments are more than just another bill to be paid because you are actually paying for the security of your family in having somewhere safe to return to. However, when you are facing overdue mortgage repayments that safety and security are at risk, unless you start the process of modifying your mortgage, to keep your family home.
- Avoid bad credit, bankruptcy and harassment. The stress of your finances and mortgage repayments being behind also comes from the harassing phone calls and letters which plague you, from the people to whom you owe money. After the letters and phone calls can come something even worse – a strike on your credit report, marking you as a bad risk to other lenders, making it very hard for you to apply for any other loans or credit cards in the future, and in some cases even employers will check your credit history. Bankruptcy is a strike which will stay on your credit history for up to seven years in most cases and loan modification is not only protecting your home, it is protecting your financial profile and future too.
- Save on late fees and penalties. When you are behind on your home loan repayments, late fees and interest penalties can make it even harder to get back on track because these have to be paid on top of your repayments. However, when you modify your home loan, you can have all of these fees and penalties waived, and start afresh.
- Lower monthly repayments. If your circumstances have changed, you may not be able to afford the same monthly home loan repayment you once could. However, that doesn’t mean you can’t afford a home loan at all, and it may be possible for you to stay in your home if you modify your home loan to lower monthly repayments.
What You Should Be Aware of When Modifying Your Home Loan
Wherever there is money involved, there will always be someone – often more than one someone – there to try and take advantage of your situation. While you may feel very vulnerable and helpless when you are facing foreclosure on your mortgage, make sure you don’t make the situation worse by falling into a home loan modification trap or scam, such as:
- False counsel. A scammer may try and take advantage of your financial stress by telling you they can negotiate a modification deal with your lender if you pay them a fee. The scammer will tell you not to contact your lender and wait for the negotiations to be completed. However, once you have paid the fee, the scammer is gone, so make sure you work with only fully licensed and registered counsellors and mortgage brokers.
- Signing for a new loan. Be careful of the bait and switch scam where you can be tricked into signing documents which are actually for a new home loan to bring your current mortgage up to date. What you may really be doing is signing over the title of your house, or signing up for an expensive rescue loan.
- Don’t rent to buy. A rent to buy scheme will be promoted as a way for you to stay in your home as a tenant, and buy it back over the next few years. However, in order to set up a rent to buy scheme you will need to surrender the title of your home and you will actually be paying more in rent over the years that you can never afford to buy back your home. Plus, you’ll also lose the benefits of any equity in your home.
- Filing for bankruptcy. Some scammers will charge a fee promising to negotiate with your lender, while in the meantime they have filed for bankruptcy in your name, without your knowledge.
- The losses of a short sale. A short sale is when the sale price of your property doesn’t cover the amount remaining on your loan, in which case the lender agrees to discount the loan balance because of financial hardship. A short sale is negotiated through your lender’s loss mitigation or workout department, and you are agreeing to sell your home for less than the remaining principle of your loan, and give the processed of that sale to your lender. However, in a short sale the lender has the right to knock back a proposed sale and this can influence whether your loan amount is discounted – if the loan amount is not discounted, then you are going to be selling at a loss.
How to Apply for Home Loan Modification
With the future of your family home at stake you want to be sure you are modifying your home loan to your benefit, not to the benefit of your a scammer, or just to the benefit of your lender. Therefore, you need to know the following tips and tricks to help you apply for home loan modification:
- Expect your lender to refuse you. Most home owners who are approved for home loan modification do not go directly to their lender, and you may also have found that your lender has refused to offer you a modification solution. That is because the lender will want to see you are facing serious financial difficulty, but you are also serious about getting it under control and the right application and the right financial advisors can help you show that.
- Don’t pay for modification fees upfront. Negotiating a home loan modification often comes with its own legal fees and foreclosure costs for work completed. However, these don’t have to come out of your pocket at the time and can be modified into your new principal loan amount.
- Encourage inspections of your home. The lender will likely want to check that your home is still in a good condition and there are no issues which will affect its value, so make sure they inspect the property during the mortgage modification process.
- Know what you can afford. You may be very clear on the fact that you can’t afford your current repayments, but you’ll need to be equally sure you can afford your new modified repayments, so consider whether you and your partner have full time or regular work and will be able to meet your new mortgage repayments.
- Tell your creditors to be patient. It can take up to 30 days for your lending company to acknowledge loan modifications so you will need to notify your current lender of the modification process to stop the letters and phone calls.
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