Loan Modification vs Refinance: Know Your Legal Options!

Introduction:

If you have fallen behind your monthly mortgage payments and you don’t have enough money to meet your financial obligations, you can lose your home. But depending on your situation, you might be eligible for a loan modification which will not only help you stay on top of your mortgage payments but also avoid foreclosure and keep your home.

A loan modification is not the same as refinancing your mortgage. Refinancing is when you replace your loan with a new mortgage, on the other hand a loan modification alters the terms of your existing loan.

What is a Loan Modification?

A Loan modification is when you make changes to the terms of an existing loan. This process may involve reducing the interest rate, extending the length of time for the repayment, another type of loan, or a combination of these.

These alterations are made because the homeowner is unable to meet his financial obligations. Settlement of most successful loan modification processes is negotiated through the help of an attorney or a settlement company. Some property-owners are eligible for assistance by the government in loan modification.

What is a Loan Modification on a Mortgage?

A mortgage loan modification is an adjustment in your loan terms. The adjustment is a sort of misfortune alleviation. The adjustment can lessen your regularly scheduled installment to a sum you can bear. Changes may include expanding the quantity of years you need to reimburse the loan, lessening your loan fee, and additionally refraining or decreasing your chief equilibrium. In the event that you are offered a credit alteration, be certain you know how it will change your regularly scheduled installments and the aggregate sum that you will owe temporarily and in the long haul.

How Loan Modification Agreement Works?

A loan modification could be made for any kind of a loan but they are most common with secured loans such as mortgage loans. A loan modification is generally granted to a homeowner in financial crisis who is unable to pay his loan under its original terms. Legal or other professional counsel represent successful applicants. A few consumers have an access to government programs that assist the mortgage-holders.

A lender may consent to a loan modification agreement during a settlement process or if a foreclosure happens. In these circumstances, the lender concludes that a loan modification agreement will cost les to his business than a foreclosure or a debt charge-off.

A loan modification agreement is different from a forbearance agreement. A forbearance agreement helps provide a short-term solution for a temporary financial problem. Whereas, a loan modification agreement provides a long-term solution for a major financial crisis.

For the negotiating of a loan modification there are two sources of professional assistance

  • Settlement companies are for-profit entities that work on behalf of borrowers to reduce or alleviate debt by settling with their creditors.
  • The mortgage modification lawyers are specialized in negotiating for the lenders of mortgages in default and are threatened with a foreclosure.

The most common type of loan modifications are the mortgage loan modifications because a large sum of money is at stake. Several government loan modification programs were established for borrowers during 2007 and 2010. Some of these programs have been expired but the government-sponsored loan modification assistance program is still available to some borrowers. These are:

  • A government-sponsored mortgage company, Fannie Mae, offers a program called Flex Modification.
  • FHA-HAMP program offers modification to the mortgages insured by the Federal Housing Authority.
  • The U.S. Dept. of Veterans Affairs gives mortgage delinquency counseling to Military veterans.

Few traditional lenders offer their own loan modification programs.

Who qualifies for a loan modification?

Not everyone who is struggling with a mortgage payment qualifies for a loan modification. Generally, burrowers must be either delinquent or facing an imminent default, which is they aren’t delinquent as of now but there’s a high possibility they can become delinquent.

An imminent default could be due to multiple reasons which include divorce, loss of a job, an illness or a disability that could potentially make one unable to repay you’re their mortgage on the original terms of loan.

Applying for a Mortgage Loan Modification

The requirements of mortgage loan modification application are the details of a borrower’s financial information, his mortgage information, and the details about his financial hardship. The programs have their own set of requirements and qualifications which are based on the amount of loan the borrower owes, the property that is being used for collateral, and the specific features of the collateral property. If a borrower gets approved, the approval will have an offer with new terms of loan modification.

What is a Mortgage Refinance?

Mortgage refinance is replacing your current home loan with a new one and there is no need of refinancing with your current lender. And unlike a loan modification, burrowers that are hoping to refinance don’t have to show that they’re going through a financial hardship or are at the risk of a foreclosure.

Rather it’s quite the opposite, unless you have a FHA or a VA loan and you are planning on refinancing into a similar loan type, you will have to meet the requirements and also demonstrate that you can afford the new loan.

Loan modification VS. Refinancing

There are two ways to lower your monthly mortgage payment, loan modification and refinancing. Most property owners hope for a reduction in their mortgage payments. However, others who have no other option to avoid foreclosure must reduce their mortgage payments. Loan modification and refinance both offer financially struggling homeowners to lower their mortgage payments. Let’s discuss the similarities and differences between loan modification and refinance.

Lower Mortgage Payments

Loan modification and refinancing both help to lower a homeowner’s monthly mortgage payment. Lenders can lower the amount of monthly mortgage by making some reduction in the interest rate, extension of the loan term, or not charging any interest on the principal balance.

The major difference between the loan modification and refinance is that, with a refinance, homeowners can get a renewed and a mortgage which has low interest. However, with loan modification, the lender simply makes modification in the existing mortgage so that the payments become more affordable.

A permanent solution for lowering a homeowner’s monthly mortgage payment is mortgage refinancing because it provides with a lower interest rate for the remaining loan term. However, loan modification is a temporary solution. After paying for five years at the modified loan rate, the rate can gradually increase to a set maximum rate. If a homeowner chooses to modify his loan, he should talk to the lender about the modification of the rate and what will the set maximum interest rate at the modified level be after five years.

Balloon Payment

The bigger than-normal installment to be made generally toward the end of a home loan term or an amortization credit, is known as a balloon payment. Lenders can bring down loan fees and regularly scheduled installments by setting a huge single amount last installment on your mortgage. A balloon loan is gainful for individuals who can’t manage the cost of an immense up-front installment to get similarly low rates. Be that as it may, the choice to enter such a home loan should be thought out cautiously; they’re unquestionably not for everybody.

Summary of Balloon Payment

  • Lower regularly scheduled installments than conventional loans
  • Higher hazard because of lump amount installment
  • Usually limited to generally reliable and pay stable borrowers

 

Loan Modification and Refinance Requirements

To be able to qualify for a government sponsored refinance program the borrower is supposed to have a mortgage that is owned by Freddie Mac or Fannie Mae and have a loan-to-value less than 125 percent. The burrower must be current on his mortgage payment.

Like refinances, the loan modification mortgages must be guaranteed by Freddie Mac or Fannie Mae have a loan-to-value less than 125%. Loan modification applicants may be behind on their mortgage payment unlike refinance. Loan modification applicants have to write a letter including details about their current financial hardship and demonstrate a significant need for lowering of the monthly mortgage payment. You also need to show that your monthly mortgage payment is at least 31% of your gross monthly income.

What Do Lenders prefer?

Since there is a renewed loan in mortgage refinancing, there is a good amount of paperwork and requirements to qualify. Lenders would normally prefer refinancing to burrowers with higher credit scores who are punctual with their mortgage payments. However, with the modern government-back program, refinance has improved and now requires even less paperwork.

However, a loan modification simply makes changes to the existing home loan with the involvement of even lesser paperwork than refinancing. Therefore, loan modifications are convenient and faster to receive. Lenders recommend loan modifications to burrowers who are currently in a financial hardship and are already late on their home loan payment because they are unable to get refinancing.

 

Pros and cons of loan modification

Pros

  • You can avoid a foreclosure by accepting a loan modification
  • You can make modifications to the loan terms and make them affordable and secure better loan plans.
  • You are not obliged to pay the closing costs when modifying your loan. Though there might be some legal fees associated with the process that might fall on you.

Cons

  • A loan modification can have a negative impact on your credit score
  • Not all lenders agree to modification to a loan term
  • If you somehow miss a payment after loan modification this can escalate the foreclosure process

Pros and cons of refinancing

Pros

  • You can have the advantage of current low rates
  • Your monthly payment can be lowered
  • You can make changes to the terms of your loan. You can change the time period of a loan or switch from a fixed-rate mortgage to an adjustable-rate loan
  • You can borrow more money than you currently owe on the property.

Cons

  • The closing costs will be paid by you
  • Variable savings depending on your current interest rate and time in home
  • You will be going through the underwriting process again

 

The final Verdict

Ultimately, it is on you to decide if you want to modify your loan get a refinance depending on your financial situation whether you can afford your loan or not. Either way, making changes in the terms of your loan could lower the interest, lowering the monthly payments which is an advantage. Don’t be reluctant and reach out to your lender and discuss the possibility of either option.

If you need help with a loan modification and your home is nearing foreclosure, call our law firm for help. We serve all of Ohio

 

 

 

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