Owning a home is one of the best financial assets you can have in life, but it can also be one of the most expensive. When you went through your mortgage loan process, perhaps they told you to set aside 1% of your home's purchase price each year for home repairs. That's known as the 1% rule, and it's a great way to stay ahead of repairs and keep from getting behind during tough times. But, it doesn't take into account that life doesn't always go our way.
If you're struggling to make ends meet, and it's affecting your ability to make your mortgage payments, then this article is for you. There are several options available to help you get back on track with your mortgage payment, but in this article, we're going to discuss loan modifications.
What are Loan Modifications?
Loans are merely a contract between you and a financial institution. You agree to pay a certain sum of money per month in exchange for a piece of property. As with most contracts, many loans can be negotiated. A loan modification is simply a negotiation between you and the financial institution that modifies part of your mortgage loan to help make it more affordable.
The idea is to help you get back on track with your mortgage payments so you don't default on the loan and trigger foreclosure. Contrary to popular belief, mortgage companies don't actually want to foreclose on homes. It's expensive for them to do so. The property has to be taken back, appraised, and auctioned off or sold at a loss to move quickly as it doesn't earn the bank money sitting in inventory. As such, most lenders are willing to work with you to prevent foreclosures. One of the most common methods used by lenders is loan modification.
Which Loan Modification Options are Available?
There are several options when it comes to loan modifications, but the majority fall under the Home Affordable Modification Plan (HAMP). Those that don't fall under this category could qualify for a VA loan modification, an FHA loan modification, or a private bank loan modification.
First, let's look at HAMP loan modifications. This was introduced in the Obama administration as part of the Making Home Affordable plan. The goal was to stabilize the housing market and prevent consumers from buying more than they could afford. The basic principle of the Making Home Affordable plan states that an "affordable" mortgage payment constitutes 31% of a consumer's monthly gross income.
Let's break that down into numbers. If you make $2,200 a month, then 31% of that is $682. But, you also have to consider how much house you're buying, what your monthly debt looks like already, and what your down payment is, as well. There is a Home Affordability calculator on realtor.com that breaks down how much house you can afford, as well as your monthly payment. But, for this example, let's assume you have a mortgage payment of $682.
Under HAMP, your loan payments are reduced by changing one or more of the components of your mortgage. The three main components of your loan are the interest rate, the length of the loan, and the principal balance. Under the federal loan modification program, your lender may allow you to lower the interest rate for a period of time, extend the life of the mortgage loan, or lower the loan's principle balance.
All of these modifications have consequences, and it's important to understand them fully before committing. For example, extending the life of your mortgage loan may lower your monthly payments, but it will ultimately increase the amount of interest you pay on your home. Make sure you know what each modification means for your home and your financial situation before proceeding.
VA and FHA loan modifications work in a similar fashion, although the specifics of each fall to the overseeing governing agency. It's best to contact them and go over all of your options. For banks who do not participate in the federal government loan modification programs, they may have their own programs to offer consumers. These are generally unpublished and have specific requirements for qualification. The best way to get more information is to contact the bank directly.
How do I Qualify for a Loan Modification?
There are two levels to qualifying for a loan modification: personal qualifications and mortgage qualifications.
The personal qualifications are easy enough. In order to qualify for a loan modification, you have to verify that a legitimate financial hardship has impacted your ability to make your mortgage payments. This may include situations such as a loss of income, loss of job, or disability. Also, it's important to note that you do not have to wait until you receive a foreclosure notice to start this process. Contact your lenders as soon as you know your financial situation is changing, and they may be able to help you get a loan modification.
The mortgage qualifications are as follows for a HAMP loan modification:
- You signed your mortgage on or before January 1, 2009.
- Your primary residence does not exceed $729, 750. Rental units have different amount requirements, so be sure to check with your lender.
- The property isn't condemned.
- You have sufficient income to meet the modification requirements.
- You must not have been convicted of a felony related to real estate in the last 10 years.
It's important to note that while the VA and FHA loans may have similar requirements, there may also be specific requirements you must meet to qualify. Be sure to contact your VA or FHA lenders to learn more about how to qualify for loan modifications.
You should also know that although you do not have to wait until you're in foreclosure to apply for a loan modification, if you are in foreclosure and are approved for the modification, it will halt the process of a foreclosure temporarily. Your lender can give you more details about how that works and what the time frame looks like for your specific situation.
What if I don't Qualify or if I've been Denied?
There are situations in which struggling homeowners do not qualify for a government modification loan. At that point, you will have to consider other options. Credit.org has a few options available to homeowners who've been denied federal assistance. Since the website is a HUD-approved counseling agency, their programs are reputable and able to assist struggling homeowners. There are also other assistance options available, which we'll cover in later articles.
How do I Apply for a Loan Modification?
Applying for a loan modification is pretty simple. First, make sure you have a budget in place. One of the requirements is to prove financial hardship, which means the lender will ask you about your income and expenses. It's a good idea to make sure you've gone over your budget thoroughly before applying. You might also want to look up your credit score, just so you know ahead of time what interest rates you qualify for with your lender.
Second, gather your mortgage information. You should refamiliarize yourself with your mortgage terms before contacting the lender. Make sure you have your loan number handy, and know what your interest rate and length of loan terms are before calling. Being prepared during a negotiation is always helpful.
Third, if you've never negotiated with a lender before, you should contact a nonprofit housing consultant for free advice and negotiation tips. This could help you make the best choice for your situation and save you money in the process. Also, they can let you know how likely you are to qualify for the modification before you even contact your lender.
Finally, contact your lender. Once you're prepared and ready to apply for the modification, call you lender and state your case. Remember, you do not have to wait until you're in foreclosure to call them, so don't put it off. Call as soon as you know you'll have trouble making the payments, and get the help you need right away.
Struggling to pay the mortgage is a reality for a lot of homeowners, but it doesn't have to be. With the right information and tools, you can take control of your financial situation and keep your home in the process. If you've been struggling to make your mortgage payments each month, it's time to consider your options. Loan modifications are a popular choice, and getting approved for one can even delay foreclosure. Contact your lender today to see if you qualify.