Are you at risk of losing your rental property because of your inability to pay your mortgage? Maybe you are wondering whether it is possible to modify your mortgage and lower your monthly payments. Is this practice done for homes that you don’t live in? Can you get a loan modification on a rental property?
The quick answer is YES but it is not easy to achieve. More details follow further down this article.
What are the things that you have to consider to qualify for a mortgage modification on your rental property?
In this article, we will discuss what mortgage modification is and whether it can be applicable to your rental property. We will also provide some information to help you in your application process and actionable tips that could help you get approved for the loan.
What is a Mortgage Loan Modification?
A mortgage modification is a process wherein the mortgage lender makes changes to your original loan to help you lower your monthly payments. It is different from mortgage refinancing because you are not applying for a new loan with new terms, rather, the lender will just revise your loan by either extending the term of your loan or lowering the interest rates temporarily or permanently. Some mortgage lenders may also combine different methods in order to provide you with a new payment plan.
A mortgage modification could help you make your monthly payments more manageable so you won’t lose your property. For example, if you have 10 years left on your mortgage and the lender offers to extend the loan for another 5 years, your monthly payments will be lower than what you’re originally paying. The downside, however, is that you have to shoulder 5 more years of monthly payments, which inevitably means paying more interest overall.
Some mortgage lenders may agree to lower the interest rates temporarily to shave a few hundred dollars off the monthly payment. If you have an adjustable-rate mortgage where the interest rate of your loan changes depending on the market rate, the mortgage lender may offer to switch you to a fixed-rate mortgage to where the interest rate will be the same throughout the period of your loan. One advantage of a fixed-rate mortgage is that the interest rate is locked, which protects you from unexpected increases in your monthly payments.
A mortgage modification can be an option if you are experiencing financial setbacks but are keen on keeping your property. If your mortgage lender agrees to provide you temporary relief, you might just have the chance of keeping your home.While a mortgage modification could negatively affect your credit score and stay on your report for 7 years, it is still much better than getting a foreclosure or bankruptcy because you still get to keep your home as long as you meet the modified monthly payments.
Is it Possible to Get a Loan Modification on a Rental Property?
It is quite common for people who are at risk of losing the home they live in to apply for a mortgage modification. For example, if a family has lived in the house for many years and the property has sentimental and practical benefits to this family, a mortgage lender may consider these factors and help the family to keep the home by modifying their original loan.
But what if it is a rental property? Is it still possible for the lender to allow a loan modification?
As mentioned previously, the answer is YES but it is difficult. It is still possible to apply for a mortgage modification even if it is a rental property. However, not all mortgage lenders may offer this option but it is still worth it to inquire about this rather than just losing your rental property.
The loan modification rules and regulations will vary depending on the lender but these are mostly guided by the Federal Deposit Insurance Corporation or FDIC which supervises most financial institutions. If your lender does offer mortgage modification as an option, ask them for the requirements with regards to rental property.
What is HAMP?
HAMP stands for Home Affordable Modification Plan that was first introduced in 2009 but has expired in December 2016. This means that this program is NO LONGER active. You can no longer apply for HAMP as of 2021.
When HAMP was first introduced, it only covered homeowners that have mortgages on their primary residence. In 2012, however, HAMP was enhanced to include investment property including rental property. The goal of HAMP was to be able to offer homeowners reduced monthly mortgage payments by incentivizing mortgage lenders and mortgage servicing companies to encourage them to modify the loans of homeowners.
Again, HAMP is not active anymore. You have to ask your lender or loan servicer whether they offer mortgage modification.
How Often Do Mortgage Modifications Get Approved?
It is not easy to qualify for a mortgage modification, especially if it is an investment property. Even with the government program HAMP in place, it was revealed in a 2015 quarterly report to Congress by the Office of the Special Inspector General for the Troubled Asset Relief Program that around 70% of all applications were denied. More than 4 million applications were rejected under the HAMP program.
Now that HAMP is no longer active and there is no incentive for the mortgage lender to modify your loan, it may be even more difficult to get approval.
How Can I Qualify for a Loan Modification for my Rental Property?
Depending on your lender, the rules and regulations on mortgage modification will differ. Some lenders may not even agree to have your loan modified but as mentioned above, it is not impossible. Some lenders may prefer to keep you as a customer if you can prove that you can keep on paying rather than foreclosing on your home.
Below are some main factors that could help your application in getting approval. Take note that these are not the only considerations as the complete set of requirements may vary from lender to lender.
1. You Have a Good Payment History.
The lender will more likely approve your application if you were a good customer over the years. Let’s say you have been paying religiously over the past 10 years on a 30-year loan and it was only recently that you became delinquent, the lender may favor you over another applicant who has a long history of delinquent payments.
2. You can Show that Your Financial Setback is Temporary
You have to prove to the lender that whatever financial setback that prevented you from paying your mortgage was temporary. For example, if the reason was that you lost your job a few months back, you can show that you have been hired for a new job or show a new source of income.
3. You can Prove that After the Mortgage Modification, You will have the Capability to Pay the Loan Amount.
The lender will also take a look at your debt-to-income ratio or your DTI. This is the debt you have to pay relative to your monthly income. You will have to show that you have enough income to cover the lower mortgage amount.
Is Loan Modification a Good Idea for my Rental Property?
Before jumping in and applying for a mortgage modification on your rental property, there are some things that you need to consider. Having your monthly mortgage payments lowered may sound like the best solution to your current woes but you have to be aware that it’s not all sunshine and roses…there are some realities you have to take note of.
1. Lower Monthly Payments Do Not Mean Your Loan Amount was Reduced
Just because your monthly payments are lowered does not necessarily mean you’re getting a better deal. In most cases, you are actually paying more in interest if your loan term is extended by a few more years.
2. Be Wary of Rolling Fees Into Your Principal Amount
If you have to pay late fees and also pay the other payments that you missed, the lender may offer to roll the total amount to your principal amount. Let’s say, your principal amount is $100,000 but you owe $10,000 in late payments and fees. Your principal will be $110,000 and depending on your loan term, the monthly payments will be calculated against that amount plus interest.
While this may provide you relief in the short-term, meaning you won’t need to pay the ten grand immediately, you have to consider that you’ll be paying interest on that money throughout the life of the loan. It may look like you’re paying less money now but you may end up owing more money than what you owe now.
3. Check if the Mortgage Modification Makes Sense Over Mortgage Refinancing
Many people are hesitant to give up a rental property if it is a major source of their income, if the property has been with them for years, or perhaps if the house is in a very good neighborhood. The desire to keep the house due to these reasons may be enough for them to check whether a mortgage modification will work for them.
If you are in the same scenario, you have to carefully check whether what you will be paying extra over the loan period after the modification will be equal to or more than the income you’ll generate from the property. Here’s a generic mortgage calculator that you can use. You also have to check whether you qualify for mortgage refinancing rather than a modification. If the mortgage interest rates are lower than what you were paying in your original loan, it may be more financially beneficial to refinance your loan with a better rate than modifying your old loan.
Getting a Loan Modification on Your Rental Property
A mortgage modification can offer you a lifeline when you’re at risk of losing your home. However, you have to carefully study the fine print when signing up for a mortgage modification agreement. Don’t be instantly blinded by the lower monthly payments. Instead, look at the full picture and see whether the mortgage modification will relieve your financial burdens or will it just sink you lower into debt.