Is a Loan Modification Right for You?

Owning a home is a huge financial responsibility and many homeowners have probably found themselves at a point where they’ve struggled to make their mortgage payments. Unexpected life events hit everyone from time to time and they can cause financial stress. Sometimes you just need a bit of a break in order to get back on track.

Depending on the circumstances, you may be eligible for a loan modification, which can make it easier to keep up with your payments and avoid foreclosure.

What is a loan modification?

A loan modification is an adjustment mortgage terms, usually due to a financial hardship. This can be an option instead of foreclosure or undertaking a short sale.   

The goal of a loan modification is to keep you in your home and reduce your monthly payments — either temporarily or permanently. This can be achieved in a variety of ways, like extending the length of the loan term, lowering your interest rate, changing from a variable interest rate to a fixed-rate loan, or even allowing you to postpone a few payments.

Keep in mind that a loan modification is different from refinancing. When you refinance, you’re replacing your loan with a new mortgage. With a loan modification, you’re simply changing the terms of your existing home loan.

Who qualifies for a loan modification?

It’s important to note that not every homeowner struggling to make their mortgage payments will qualify for a loan modification. Patricia Simpson, real estate collections manager with Lake Michigan Credit Union, says the options available and the process involved really depends on the investor.

“Unfortunately, there is no one-size-fits-all approach to modifications,” she said. “Fannie Mae will offer different programs than Freddie Mac or the Federal Housing Administration (FHA) or the Veterans Administration (VA), and they’ll all have different application processes and qualifying criteria, so you’ll need to speak with your lender to understand your options.”

Typically, borrowers must either be delinquent for about 60 days, or they must be in imminent default, meaning they’re not delinquent yet, but there’s a high likelihood that they will be.

In most modifications, a homeowner must also provide proof of hardship or a hardship letter explaining what happened — maybe the loss of a job, a divorce, a disability or illness, etc. — and how it has affected their ability to make mortgage payments.

In addition to the letter, a borrower will need to complete an application and likely provide additional documentation, including pay stubs, bank statements, tax returns, loan statements, etc.

How do I find out if a modification is right for me?

If you find yourself struggling to make your mortgage payments, the first thing you should do is contact your lender.

“Most importantly, don’t wait until you’re behind to call,” said Simpson. “A modification isn’t necessarily the only solution when borrowers fall on hard times, so have the conversation with your lender as soon as you anticipate a problem. Together, we may be able to come up with an alternative plan.”

If you aren’t necessarily experiencing hardship, but want to lower your monthly payments to lighten your financial burden, refinancing into a loan with lower interest rate may be an option. However, Kyle Leemon, mortgage sales manager with Lake Michigan Credit Union, says there are a lot of factors that go into this decision.

“Simply lowering the interest rate might not always be a good reason to refinance,” he said. “Your lender should be asking specific questions, like how long are you going to own the mortgage? Are you going to make additional payments on the mortgage? Is the goal to reduce your monthly payment or to reduce your long-term interest or mortgage insurance?”

This need for open communication between lender and borrower is why it’s critical for homeowners to work with a trusted, local lender who is looking out for their best interests.

While any borrower with any type of loan can run into financial trouble, Leemon says it’s important for buyers to partner with a lender who works from the start to match their mortgage with their short- and long-term goals.

“I believe that if a mortgage is not structured properly with the borrower’s goals in mind, it can become both a financial and emotional burden,” he said. “We use a tool that lays out all the options in a side-by-side comparison, considering all factors we discuss with the borrower. This really helps our clients determine the best mortgage solution for their specific situation and helps reduce the likelihood that they’ll get behind in the future.”

Visit the Greater Lansing Association of REALTORS^® website at www.lasnsing-realestate.com for a list of local lenders who are ready to help you not only obtain a mortgage, but also guide you through any issues that pop up along the way.