Qualifying Criteria and Frequently Asked Questions Regarding Loan Modifications
Qualifying Criteria and Frequently Asked Questions Regarding Loan Modifications
A loan modification has actually been around, in-house, with the majority of the lending institutions, however they have rarelybeen permanent. In March 2009, the Federal Government introduced HAMP, or Home Affordable Modification Program. If you haven't researched the possibilities and the qualifications required for a modification with your lender then the process may be frustrating and discouraging. By learning more about the requirements specified within HAMP or an in-house modification, you then will be able to present your situation in the best light possible.
What are the guidelines then for homeowners to qualify in receiving a modification? There are five main qualifying elements in receiving a modification:
1st Is this your primary residence or is the home owner occupied? If so, you potentially qualify.
2nd Is your home valued less than $729,750? If so you potentially qualify.
3rd Was your home originated before January 1, 2009?
4th What financial hardship are you currently experiencing? Without a financial hardship banks/lenders will most likely not consider you for a modification. A hardship can be either unemployment, reduction or decrease in income, divorce, etc
5th Is your current mortgage payment greater than 31% of your gross income?
These five elements are used by lenders to determine if you qualify for a modification. Upon reading these qualifying requirements you may have more questions pertaining to modifications. Here are 10 of the most common questions homeowners ask frequently:
1. What is the purpose of a loan modification? A loan modification is either a temporary or permanent change to your current note or terms of your loan. Some banks will only perform a temporary modification lasting up to 18 months, however with the new HAMP program many lenders are participating and making permanent changes to the existing terms on your loan. So it is different than a refinance because you are not originating a new loan to replace the existing loan. The existing loan terms are modified by your current lender to meet your current circumstance.
2. Will a modification hurt my credit score? Yes, a modification has the potential to adversely affect your credit score. It really depends on your lending institution and how they report the lower payment during the trial period, and other factors determined by your lender. Also, some lenders, particularly FHA loans, will not accept your application for a modification unless you are at least 30 to 60 days late on your mortgage. As such, if you are late then your credit will be affected.
3. What happens to my late fees/charges? If you qualify for a modification, the late charges should be waived at the time of consummating a permanent modification.
4. How is my second mortgage affected by a modification? There are three possibilities in modifying the existing terms of your second mortgage. First, the lender may agree to permanently reduce the payment. Second, the lender may agree to fully waive or forgive the second mortgage payment. Finally, the second mortgagee may agree to either forbear or defer payments until a later date when the homeowner will more likely to be able to payback previously agreed and signed terms.
5. How does a modification reduce my payments? There are three methods by which this is accomplished. The first is to reduce the interest rate on your loan from the current note rate to down to 2% (most common practice with modifications). The second would be to extend the term of your loan from 30 years to 40 years. And the third option is a principal write-down lowering the current loan balance.
6. I have just received a notice of foreclosure, will a modification stop it? If you have received a permanent modification, then "Yes", the main purpose of a modification is to assist responsible homeowners who are currently experiencing a financial hardship. By working with your lender, providing accurate evidence of your situation, and your ability to keep a new payment commitment, permanent modifications will halt foreclosure if you stay current with the new modification.
7. I have heard if you aren't delinquent on your payments lenders won't work with you? Although banks will consider more heavily borrower's with delinquent payments, HAMP includes incentives for banking institutions to help prevent at risk borrowers who have not yet missed a payment, but may do so in the future. Refer back to question #2 also.
8. Missed payments, what happens to these? This is defined as payments in arrears which the program covers and which will be typically added to the new balance of your loan, verses the lender forgiving the payments.
9. How do I get started? One of the main reasons homeowners are disqualified for a modification is simply because they have not researched the requirements and qualifications to a modification. Before you begin applying for a modification research, research, and more research.
10. What about working with a third party to negotiate the terms of my loan? This is entirely dependent upon the individual homeowner. If you feel you have the knowledge, the negotiating skills and the time to contact your lender then, why pay a third party to do what you can do yourself. The reason why we seek help is because we feel inherently incapable ourselves. If you do choose to work with a third party make sure again you do your research. For example, what are the costs and will a modification outweigh their fees? Also, are they professional and experienced in successfully consummating a loan modification? Do they offer a guarantee for their service, and if so what type of guarantee? Does the guarantee create a balanced agreement, or does it favor the third party?
These questions and others will help you help you understandqualifying criteria for a modification, andanswer common questions themajority of homeowners have.