One of the most asked questions about qualifying for loan modifications is whether or not you have to be behind on your payments or just in danger of falling behind. It used to be that you had to be delinquent on your mortgage payments to qualify for assistance, but the rules have changed.
Qualifying for a Loan Modification
In the past, mortgage servicers recommended homeowners fall behind on their mortgages to qualify for loan modifications, but this is outdated advice. After the housing crisis, rules were changed to help ensure homeowners could take action before falling behind. As it stands now, you can be current on your mortgage payments and still qualify for a loan modification.
What You Need to Show to Qualify
There are different steps you need to take when you're current on your mortgage versus when you're delinquent, and both processes require some proof of hardship. In the case where you're current, here are a few things you'll need to show your lender.
- The home is your primary residence.
- You've experience some sort of financial hardship, i.e. lost your job, had an injury and haven't returned to work, or went through a divorce.
- You have enough income to make continued payments under a loan modification agreement.
If you meet these three criteria, you may qualify for a loan modification. Request an application, fill it out, and submit it with the required documentation in a timely manner. Working through the process as quickly as possible will help keep you from falling behind.
Falling Behind Deliberately
In rare instances where homeowners haven't been approved for loan modification when they were current on their payments, many resorted to deliberately falling behind on their payments to qualify for a loan modification.
First, if you've ever been advised to fall behind in order to qualify, contact an attorney right away. Many attorneys offer a free consultation to discuss your situation before you decide to hire them, and they will tell you if the advice you were given was legitimate or not. In general, falling behind on your payments can have serious long-term repercussions, and you should do what you can to avoid it at all costs.
Consequences of Falling Behind
Here's a look at some of the consequences you could face if you fall behind on your payments.
Your credit score will drop. To fall behind on your mortgage payments significantly enough to warrant a loan modification means that you're more than 30 days past due. Anything over 30 days past due gets reported to the three major credit bureaus and your score drops accordingly. The later you are, the more your score will fall.
If your credit score drops, you could have trouble getting approved for other loans, and you could face an interest rate increase with your credit cards. You need to consider your financial situation carefully before deliberately falling behind on your mortgage. Will you need a new car soon? If so, are you comfortable paying up to 17% on a car loan? What about your credit cards? Are you ready to pay up to 30% interest on those balances?
Loans and interest rates aren't the only things affected by your credit score. Here are a few more areas that could be detrimentally affected by a drop in your credit score: your car insurance rates, homeowner's insurance rates (in states where it's allowed), your utility deposits, your cell phone plan options, potential employers, and rental agencies (if you lose your home and have to rent).
Some of these assume an extreme drop in your credit score, but most people don't realize how much of their lives are tied to that score. It's important to protect it as best you can, even if that means you have to sell your home and move somewhere more affordable.
It's also important to note that even if you do get approved for a loan modification, this does not change any adverse reports that were already submitted to the credit bureaus.
Past-due amounts and fees don't go away. If you fall behind on your mortgage payments, those payments still continue to accrue, as does the interest. Most mortgage companies also charge late fees and other fees associated with delinquency, which all get added to the principal, and then accrues interest. The further behind you get, the more you'll have to pay, and the harder it will be to catch up if your request for a loan modification is denied.
Foreclosure is a real option when you fall behind on your payments. Not every application for a loan modification is approved, which means if you've significantly fallen behind on your payments and been denied a modification agreement, you could be looking at a foreclosure. This is a vicious cycle that leads you back to more credit damage, thus making it difficult to get home loans in the future.
It's important that homeowners only buy as much house as they can afford, and even then, it's advisable to be modest. Circumstances in life change rapidly, and the last thing you want to do is fall behind on your mortgage. Contact your lender right away if you reach a point where you might miss a payment.
If you can't get approved for a loan modification, contact a HUD-approved counselor or an attorney to discuss alternatives to foreclosure. It's better to move than to ruin your credit and waste money on unnecessary fees.