In this article, you will learn:
- The ins and outs of loan modification and refinancing your mortgage
- When a loan modification can be a wise move
- What is needed to begin the process
Loan modification and refinancing the mortgage are distinctly different. The way I explain it to most people is to say that a refinance is a new loan. It could be the same bank, but it frequently is different. You are potentially using equity to show that you should have a lower interest rate and applying as if you’re buying a new house. It is a brand-new loan, you would have a closing with the title company to sign off on the loan, the old mortgage is released, and you would have a new first mortgage. Alternatively, modification is just what its title means; you are modifying your existing mortgage, not changing the lender, you’re not changing the servicer, you’re working with the current lender to change the mortgage terms to make the loan more affordable.
Qualifying For A Loan Modification
Qualifying for a loan modification is going to depend on the type of loan you have. There are significant differences. I say that because whether you have an FHA loan, Fanny Mae or Freddy Mack, whoever is behind the scenes backing your loan, they get to choose what the modification qualifications are. Everybody might qualify, and that’s a big word “might.” However, if you don’t apply, it’s guaranteed that you won’t qualify. So, if you are interested in trying to modify a mortgage, apply. You can go through the process, and see what the lender offers.
The Documents Needed To Make A Loan Modification Request To Your Bank
There are some general documents that all lenders will want. However, there’s always a chance they have something different. The first one is a hardship letter. You need to write up a letter explaining what the hardship is, and why you need a modification. As far as I have experienced, every lender wants a hardship letter. In addition to that, you’re going to need to prove your income, for which they want paystubs. If you are self-employed, you need to be able to verify that income, or they’re going to give you a hard time. They also frequently want tax returns, but instead of you sending them, they’re going to have you fill out a form that gives them permission to pull your tax transcripts straight from the IRS. In addition, they’re going to want bank statements or anything that displays your income versus your budget, since they want to have a full picture of your financial background. You can go to loan mitigation and they will have a list there of what you need and a form that gives you everything specific, but for the most part, it’s proof of your financial status.
When A Loan Modification Make The Most Sense?
When someone is in trouble with their mortgage is when a loan modification begins to look appealing. Ideally, the best time is if you’re in a situation and the writing is on the wall, you know it’s coming, but you’re current. There’s a really good chance that filing and trying for a loan modification is going to get rejected because you’re current. I don’t like telling people to fall behind a new mortgage, and if you fall behind in your mortgage, catching up is close to impossible, and it also hurts your credit. Still, for most companies, although it is better now than it used to be, they want to see someone who can’t afford it. They want a hardship letter; they want to know why you need a modification because part of it is if you can afford your mortgage as it is, why would they modify it? So, if you’re current, they can assume that you can afford your mortgage. They might not know that you’re borrowing money from mom and dad, they might not know that you pulled money out of 401(k), and they just don’t know the details of your situation. All they know is you’re current.
Now, if you’re falling behind on purpose, I tell everybody save the money that you were going to send to your mortgage, do not use it. Put it in a bank account, put a little bit extra because you’re going to get hit with the fees and penalties, and save it, so if you get turned down, you can get current, and you’re not facing foreclosure while you’re trying to go through the process. If you are current, you might want to just call them up and talk to them about it first, because if you apply and they turn you down, they might not have to. However, it depends on what the rules are at that particular time because they seem to change every once in a while. They don’t have to consider it a second time. If you know you’re going to be in trouble in six months but you’re not now, you might want to wait until you’re actually in trouble to ask for it. Additionally, the CARES Act has changed that; I should say COVID has changed that. People are getting modifications easier because some of the requirements for paperwork have been toned down a little bit, but I would still make the phone call first if you are current on your mortgage and looking to keep it that way.
For more information on Loan Modifications in Illinois, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (847) 440-5998 today.