If you’re behind on your mortgage payments or even facing foreclosure, you might be able to save your mortgage by requesting a loan modification or refinancing your mortgage. On July 23, 2021, the Biden Administration announced a new plan to offer mortgage relief to homeowners, reducing some mortgage payments by up to 25%.
Under the new plan, homeowners negatively affected by the pandemic will now receive assistance with government-backed mortgages. Government-backed mortgages are FHA loans, VA loans, and USDA loans. Specific assistance will vary depending on the homeowner’s level of hardship, ability to repay, and other factors.
Keep reading to find out how loan modifications work and how to make a request.
Not facing foreclosure? If you have a good credit history and income stability, now is the best time to refinance your mortgage. The FHFA recently eliminated the 0.5% refinance fee (which will take effect August 1, 2021), and lenders have dropped their refinance rates as low as sub-3% for qualified borrowers.
What happens when you get a loan modification?
When you apply for a loan modification, you ask your mortgage lender to change the terms of your home loan. If you’re at risk of foreclosure, most lenders will agree to begin the process. However, a request doesn’t guarantee that your lender will approve the loan modification.
In general, it benefits the homeowner and the mortgage lender to approve a loan modification if the loan is at risk of foreclosure. That said, the homeowner must qualify for the new terms and meet the new payment schedule.
Depending on your situation, your mortgage lender might offer a combination of loan modifications.
How does a loan modification work?
Loan modifications come in a few different forms. Some options will reduce your monthly mortgage payment and make it more affordable. Other options will postpone past due payments or restructure your loan to bring it current. The goal of loan modifications is to make your mortgage more affordable and help you stay current on your payments.
Common loan modifications:
- postpone past-due payments by rescheduling them to the end of the loan term (thereby extending your mortgage)
- reduce the interest rate (temporarily or permanently)
- change the mortgage loan type (adjustable-rate vs. a fixed-rate)
- extend the mortgage loan term (30-year vs. a 40-year loan)
Who is eligible to request a loan modification?
If you are a homeowner facing any of the following situations, you might be eligible to request a loan modification. Requesting a loan modification for your mortgage doesn’t mean you’ll qualify. However, for homeowners who can repay a modified mortgage, lenders will typically work with you to avoid foreclosure. You might be eligible if you are:
- facing foreclosure
- dealing with long-term financial hardship
- several months behind in mortgage payments
- recovering from financial hardship due to the pandemic
What documents are needed for a loan modification?
- income and expenses budget worksheet
- two years worth of tax returns
- recent pay stubs
- proof of other income (unemployment, alimony, etc.)
- current credit history (click for a free credit report)
- letter explaining financial hardship
Be prepared to write a letter of financial hardship.
In your letter, offer specific facts surrounding your financial situation and be straightforward—for example, a job loss, divorce, or medical illness. Include related dates and how the event(s) affected your finances. Offer specific facts about why you were not able to stay current on your mortgage and whether or not this is a short-term or long-term hardship.
If your hardship is connected to COVID-19 and events related to the pandemic (e.g., needing to home school, closing a business, loss of lease, reduced pay), include these facts in your hardship letter.
Be prepared to show you can repay a modified mortgage.
Mortgage lenders will want to verify financial hardship and see that you can pay your mortgage if your loan modification is approved. For example, you may have missed several payments due to unemployment or other hardships related to the pandemic, but now you are regularly employed again.
What are the benefits of a loan modification?
- possibly reduce your monthly mortgage payment to make it affordable
- resolve delinquent status with your mortgage lender
- better than foreclosure on your credit history
- ability to stay in your home and build equity
Loan modifications for government-backed loans are available now to a broader audience, and homeowners should apply if they are facing foreclosure. Still, requesting a loan modification can be frustrating for some homeowners, especially if the events surrounding late payments are difficult to explain. In addition, a loan modification might be denied if you don’t appear to have the ability to repay a modified mortgage, even with a lower payment.
Refinancing a mortgage is a better option for homeowners with home equity and stable income. Mortgage rates are still down, and flexible terms are available.
Requesting a loan modification can be a difficult decision. Contact the mortgage lender who services your loan to determine your options. For homeowners with stable income and home equity, we can help you refinance while mortgage rates are low. We partner with mortgage lenders throughout California, Oregon, Washington, and Colorado. Give us a call. We’d love to help.