If you’re struggling to pay back your loan because of your current financial circumstances, you may apply for a loan modification from your lender. A loan modification involves changing the terms of your existing loan to make its payment more manageable. It’s one of the options to avoid foreclosure including filing for bankruptcy. As long as you’re on track with your payments, the bank cannot foreclose your home.
What is a Loan Modification?
Once again, loan modification involves making changes to the terms of an existing loan, with the approval of your lender. Once your loan gets modified, it will have a lower interest rate, longer repayment period, a different type of loan, or even a combination of these three. Loan modifications may apply to different types of loans but the most common one for mortgages. Once you secure approval for your loan modification request, you need to pay your dues under the modified repayment plan on time to avoid foreclosure.
What Happens When You Apply for a Loan Modification to Avoid Foreclosure?
When you submit a loan modification application, the bank will be prevented from dual tracking. It’s when the bank moves forward with the foreclosure process while a loss mitigation application, such as a loan modification request, is pending. Once your request is approved, the bank can’t foreclose your home as long as you make your modified payments on time.
What are the State Laws that Don’t Allow Dual Tracking?
There are states that don’t allow dual trackings, such as California, Colorado, and Nevada. These states have a Homeowner Bill of Rights which doesn’t allow the dual tracking of foreclosures. Therefore, banks must first decide whether to approve or deny a loss mitigation application such as a loan modification before they can start or continue the foreclosure process.
However, there’s a certain deadline you need to meet if you want your property to be protected from foreclosure. So, be sure to familiarize yourself with these laws especially if you live in a state that protects homeowners at risk of foreclosure from dual tracking.
Aside from state laws, there are federal laws that prohibit dual tracking. If the bank received your loan modification request or any loss mitigation application more than 37 days before the foreclosure sale, it cannot proceed with the foreclosure proceedings unless any of the following conditions are met:
- The bank must inform you that you’re not eligible for any loss mitigation option.
- You reject all offers related to your loss mitigation request.
- You fail to meet the terms of the loss mitigation option.
You also need to remember that under the loan modification rules and regulations, banks can’t trigger a foreclosure process unless you’re more than 120 days delinquent. Moreover, even if you are 120 days behind on your payments, and you submitted a loan modification request or any loss mitigation application before the bank’s filing to initiate the foreclosure process, the bank can’t begin the foreclosure process unless the following conditions mentioned above are met.
You should also make the most out of the 90-day “right to cure” period. Your lender or bank must issue a writing notice informing you that you’re already in default. The notice must also indicate that you have 90 days to bring your loan current, or submit a loan modification request before any fee related to foreclosure is added to your balances.
Does the Government Offer Mortgage and Housing Assistance During the COVID-19 Pandemic?
A foreclosure moratorium and the COVID hardship mortgage forbearance are the protections offered to those whose home loan is backed by the federal government, Fannie Mae, or Freddie Mac.
If you’re struggling financially because of the coronavirus pandemic, you may be eligible for a COVID hardship forbearance of up to 180 days, which can also be extended at least once. You need to contact your servicer and request a forbearance.
If you have a VA, USDA, or FHA loan, you need to request an initial forbearance before June 30, 2021. You can also ask for an extension of up to 18 months provided that you started the forbearance plan on or before June 30, 2020, (extension request for those who already entered a forbearance program in 2020).
If your loan is backed by Fannie Mae or Freddie Mac, there’s no deadline indicated for the submission of an initial forbearance request. You may also request for an extension of up to 18 months of total forbearance as long as you obtained your initial forbearance on or before Feb. 28, 2021.
Keep in mind that not all borrowers who received an initial forbearance are qualified for the maximum months of total forbearance. Contact your servicer for more details. Additionally, regular payments will be restored without any additional interest or fee once the duration for the forbearance is over.
When it comes to foreclosure moratoriums, loan servicers can’t foreclose on VA, USDA, FHA, Fannie Mae, or Freddie Mac-backed loans until after June 30, 2021. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( Subtitle A, Title IV – Coronavirus Economic Stabilization Act of 2020), homeowners with loans backed by these entities prohibit servicers and lenders from initiating a foreclosure process or finalizing a foreclosure sale or judgment against them, which began on March 18, 2020. The CARES Act includes various provisions that offer help to borrowers of government-backed loans who are struggling financially due to the coronavirus pandemic.
When Do You Need to Get a Loan Modification?
When you find yourself in a situation wherein you’re no longer capable of paying back your original loan, you may consider a loan modification application from your lender. Aside from filing for bankruptcy, a loan modification is one way of avoiding foreclosure. If a foreclosure is imminent or during a settlement procedure, lenders may approve your request for a loan modification if this option is proven to be less costly compared to a charge-off or a foreclosure.
What are the Requirements When Applying for a Mortgage Loan Modification?
When you apply for a mortgage loan modification, you will be expected to provide the following information:
- Financial information (income, bank statements to prove that you can afford modified repayment plan)
- Mortgage information
- Hardship statement (it must explain hardship situation e.g. divorce, transition to a lower-paying job)
Keep in mind that lenders have different requirements and eligibility criteria. Generally speaking, they will factor in how much you owe, the property, and its features.
Banks may also initiate a trial period plan, which is usually 3 months. During this time, you need to show that you can afford the modified repayment plan that was created in response to your loan modification request. The loan modification will be made permanent if the trial period is successful. But if it fails, the lender may start or restart the foreclosure process or initiate a different loss mitigation option such as a new repayment plan or a forbearance agreement.
You should also consider showing that you’re making an effort to pay your mortgage, such as reducing your other expenses by presenting your billing statements or showing your credit card statements with lower credit card balances. It will help improve the chances that your servicer will negotiate with you.
Are there Government Programs for Borrowers Seeking Loan Modification?
Borrowers with government mortgage loans may be eligible for these loan modification assistance:
- Fannie Mae offers the Flex Modification program.
- Borrowers with FHA loans may apply for a loan modification through its FHA-HAMP program.
- The US Department of Veterans Affairs offers mortgage delinquency counseling for military veterans with VA home loans.
Why Apply for a Loan Modification?
If you’re financially stressed and unable to repay your loan, a loan modification may provide you with financial relief. There are many reasons why you should request your lender for a loan modification.
- Reduced repayment amount
- Reduce interest rate
- Lengthen repayment term
- Avoid foreclosure
What are the Disadvantages of a Loan Modification?
Just like all the other types of foreclosure avoidance options such as filing for bankruptcy which will leave a negative mark on your credit report, a loan modification also comes with its own set of drawbacks. Knowing what these are will help you decide if this option is for you.
For instance, if you’re seeking out this option, your loan is most likely already delinquent and your credit score has already taken a hit. If you decide to move forward with a loan modification, your credit report will show that the loan in question is being paid by modified terms. As long as you pay on time under the new terms, you will eventually see improvements in your credit score. But if you don’t, your score will drop even further.
One of the main drawbacks of a loan modification involves the cost. A loan modification may involve extending the duration of your repayments. Adding more years to the loan means paying more interest over the loan’s duration.
Another disadvantage is the time and effort involved in the loan modification process. It can be stressful and time-consuming, especially when it comes to gathering all the requirements such as your pay stubs, tax returns, and bank statements when you submit a loan modification request.
The last disadvantage is the possibility that your loan modification request will not be approved. The approval of your request depends on your financial hardship situation. You need to prove that you’re financially struggling, that's why you can no longer afford to make payments. On the other hand, you also need to prove that you can meet your payment dues if the loan is modified.
A loan modification is one of the options to avoid foreclosure. It’s intended for homeowners who are struggling with their current repayment plan. A loan modification, if approved by your lender, will result in a lower interest rate, lower monthly payments, and extended repayment duration. When you submit a loan modification request, the bank can’t continue with the foreclosure proceeding. If approved, it can’t foreclose your property as long as you make timely payments.
If you’re struggling with your mortgage payments because of the COVID-19 pandemic, you may be eligible for government assistance such as the COVID hardship forbearance and foreclosure moratorium. You may also consider government programs such as Fannie Mae’s Flex Modification program, FHA’s FHA-HAMP program, and the USDA’s mortgage delinquency counseling.