Will I Qualify for a Mortgage Loan Modification?
Applying for a mortgage loan modification is much like applying for a general mortgage. Factors for the lender to consider in a loan modification will include income and the likelihood that it will continue, as well as how much equity you have in the property.
Primary Residence
Getting a loan modification on a primary residence, which is the property where the borrower lives as their main home, is usually much easier than getting one on an investment property.
As a rule, lenders are more conservative with investment properties than with homes that borrowers live in. This reason is because if a landlord is dependent on renters for the income to cover the mortgage payments, the fact is renters may pack up and leave at the end of their lease, sometimes earlier. The renters have no attachment to the property.
However homeowners usually have an emotional attachment to their property, and usually do what they can to keep it. Additionally, knowing that a foreclosure could disqualify them from buying another home for the next four to five years gives them more incentive to want to keep their home, or at a least get out from under the mortgage without going through a foreclosure.
Financial Hardship or Distress
Borrowers, for a variety of reasons, may find themselves in financial hardship, causing them to be unable to pay their mortgage every month. Loss of income or unexpected expenses are generally the culprits, and may legitimately result from job loss, business difficulties, a divorce or a medical situation, among causes.
Lenders understand that this stuff happens, but they want to know how a borrower is going to move forward from the hardship and into a position to be able to make payments once the mortgage is modified.
Write a hardship letter to the lender at the beginning of the process, and include it in the modification application package to both help save time for overworked lender employees, and clarify where you, the borrower has been, and where you are headed.
Read more: Financing Help for Low-Moderate Income Buyers, Distressed Borrowers and First Time Buyers
Unable to Refinance Mortgage
Refinancing into a lower interest rate or better terms is usually the preferred option for borrowers who are looking to lower their mortgage costs. A loan modification is typically the choice for those who can’t refinance, or whose mortgage already offers attractive terms but need some temporary “breathing room” to get through a financial hardship.
However, because a refinance needs good credit , borrowers who expect possible financial stresses down the road should begin to explore a refinance immediately, rather than wait for trouble to arrive. A borrower who has begun to miss or be late on mortgage payments will likely face challenges in trying to refinance, due to a damaged credit rating, and might find that a loan modification is their sole option at that point.
Debt-to-Income Ratio
One of the main factors a lender takes into consideration for loan modifications is the borrower’s debt-to-income ratio. This is the ratio of gross monthly income (before taxes) to total mortgage payment. Lenders vary in the maximum debt ratios they’ll accept, but are generally in the 36 percent to 45 percent range. Compensating factors such as credit score, and the amount of equity in the property will lend to the decision that the lender makes in determining if a borrower should get a loan modification.
Considering the above, will you qualify? If you’re still not sure, contact us today!
FAQs
Generally, you can qualify for a loan modification if you've had an income loss or reduction that caused you to miss your mortgage payments. Or you have to be in imminent danger of falling behind on payments. But you must have sufficient income to make modified payments.
How do you win a loan modification? ›
If you're facing financial hardship, your lender may agree to a mortgage modification that lowers your payments and lets you keep your home. To qualify, you'll need to demonstrate difficulty making mortgage payments, document your hardship and show that you'll keep up with new, lower payments.
Is it hard to get approved for a loan modification? ›
No matter how focused your attention to detail, your credit score almost certainly will take a hit with a home loan modification. Often, a homeowner won't get approved for a loan modification unless there is evidence of one or several missed payments. Those missed payments hurt your credit score.
What do underwriters look for in a loan modification? ›
One of the tools that the underwriter will rely on is called Net Present Value or NPV. As its name implies, NPV shows how much the current mortgage is worth today. If the modified mortgage has a more significant investment value than the unmodified mortgage at its present state, likely the NPV will be positive.
Why would you be denied a loan modification? ›
There are many reasons a lender might deny an application for a loan modification or claim you don't qualify for one, including but not limited to: An incomplete or untimely loan modification application. Insufficient finances to afford a modified payment.
What do they look for for a loan modification? ›
How to Qualify for Loan Modification. Generally, you can qualify for a loan modification if you've had an income loss or reduction that caused you to miss your mortgage payments. Or you have to be in imminent danger of falling behind on payments.
What is considered a hardship for a loan modification? ›
Provide proof of significant financial hardship, such as long-term illness or disability, the death of an income-providing family member, a sudden hike in housing costs like property taxes, divorce or natural disaster.
How much income do you need for a loan modification? ›
If you do not have consistent income to be able to make the new payment under the loan modification, your request will likely be denied. A new proposed monthly payment on a loan modification (including your property taxes and insurance) should be about 31% or less of your monthly income.
How long does a loan modification approval take? ›
If the lender or servicer does not offer a streamlined loan modification, the process will depend on the mortgage lender, the ability to work through the procedure with your lawyer and other factors. The loan modification process could take to 3-6 months.
What is the disadvantage of loan modification? ›
Paying more interest over time.
If you have agreed to a lower monthly payment without significantly reducing your interest rate, you may end up paying more money in total because you are paying interest for a longer time than you otherwise would have.
Bank statements play a crucial role, revealing your financial habits, income, and spending, impacting mortgage approval. Underwriters check the last two months (or up to 12-24 for self-employed) for savings for down payment, affordability of monthly payments, and cash reserves.
What are the rules for mortgage modification? ›
Surplus income is the amount of money left after the borrower pays all of their monthly obligations. To qualify for a loan modification under federal laws, the borrower's surplus income must total at least $300 and must constitute at least 15 percent of his or her monthly income.
What do the underwriters check for final approval? ›
Let's discuss what underwriters look for in the loan approval process. In considering your application, they look at a variety of factors, including your credit history, income and any outstanding debts. This important step in the process focuses on the three C's of underwriting — credit, capacity and collateral.
How do you negotiate a loan modification? ›
During meetings with your lender, you can negotiate the interest rate, the term of the loan, late fees, and any good faith payment you are prepared to make. Remember that you may not be able to negotiate the principal or any amount that you still owe from before you applied for the loan modification.
Do you need good credit for loan modification? ›
You do not need good credit in order to qualify for a loan modification. The only factors considered prior to a loan modification offer are the homeowner's income and expenses so that the homeowner's net income per month can be determined.
Can they foreclose during loan modification? ›
For example, because the foreclosure process is halted once a modification application is filed, homeowners may have more time to work out an arrangement with their lender. The protections afforded by these laws can also affect the success rate of loan modifications.
Can you negotiate a loan modification offer? ›
A loan modification can change the principal of the loan, the interest rate, and other terms to make the loan more affordable. However, a lender must agree to the loan modification, which means borrowers must negotiate with them.
Can you get cash out with a loan modification? ›
You want to take cash out of your home equity.
Borrowing from your home equity isn't possible with a loan modification.
Will I Qualify for a Mortgage Loan Modification?