Home Loan Modification

Between 2007 and 2014 millions of home owners proactively reach out to the company that was servicing their home loan in an attempt to modify the terms of their current home loans. In many situations, banks proactively reached out to home owners who currently had loans that were considered a higher level of risk like pay option adjustable rate mortgages or some of the high-interest rate second mortgages and offered to either lower the interest-rate or even forgive a portion of the debt.

Many of these banks inherited these loans from other banks when Countrywide Financial was purchased by Bank of America they acquired over 500,000 option-ARM loans and within the first two years had modified almost 50% of these loans into more stable mortgage products.

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The Home Loan Modification

A loan modification is the permanent restructure of an existing home loan. The restructure can represent several different types of changes to the current home loan obligation:

Interest-Rate Conversion-

This type of loan modification will either convert an adjustable interest rate from an adjustable rate mortgage to a more stable fixed rate or will lower the interest rate and effectively lowering the monthly payment. Some of these interest-rate modifications were permanent, while others including the government’s Home Affordable Modification Program, only reduced the interest rate for a period of time and then the rate would convert back to the original rate.

Loan Term Extension-

This type of loan modification will extend the remaining period of the loan which will lower the monthly payment. For example: if a $250,000 loan has a term of twenty years at an interest rate of 6.5%, the minimum monthly payment required is $1,863.93 per month. If that loan is extended to a forty-year term at the same interest rate the minimum payment falls to $1,463.64 or a monthly savings of 21%.

Principle Reduction-

This is the holy grail of loan modifications, in this situation the lender will reduce the outstanding balance of the loan and moving forward your loan will be based on the payment of the new loan amount. It is always important to research the tax implications of a principal reduction loan modification and there are also some agreements that require the homeowner to not sell the property for a specific period of time.

Forbearance- This type of loan modification is typically reserved for homeowners who are experiencing a temporary hardship and the lender will agree to reduce or suspend monthly mortgage payments for a period of time. In many forbearance modification situations, the suspended payments are applied to the end of the original mortgage term.

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Impact of a Home Loan-Modification on a New Loan

When someone applies for a new home loan, one of the first places that a loan officer will look to determine qualification will be the credit report. If there were late mortgage payments related to the loan modification, the credit score will be impacted as a result of the delinquency. In many circumstances of loan modification, the lender will report to the three credit bureaus specific language related to the modification within the report. It does not make a difference if the property that was modified was an owner-occupied, second home, or investment property nor does it matter what type of loan modification, interest-rate conversion, extension of loan term, principal reduction, or forbearance, a lender will classify any form of loan modification as a settlement of debt and will apply guidelines related to the loan modification.

Fannie Mae-

Mortgage lenders who underwrite specifically to Fannie Mae guidelines will require a minimum of twenty-four months from a loan modification to provide a new home loan.

Freddie Mac-

Freddie Mac does not have a required waiting period from a loan modification to the ability to secure a new home loan that meets the loan amount limits of Freddie Mac. If you are working with a lender that is unable to provide a conventional or conventional high-balance loan with less than a twenty-four-month time from a loan modification, that lender is more than likely unable to provide home loans that are underwritten specifically to the requirements of Freddie Mac. This “additional guideline” is what is referred to as a lender overlay which the bank that the loan officer works for places on top of the actual guidelines set forth by Freddie Mac. The solution in this situation is to identify another loan officer that is not limited by the same lender overlays.

FHA-

The Federal Housing Administration or (FHA) loan programs do not have any restrictions related to loan modifications. If you are being told that there is a waiting period related to a recent loan modification it is a lender overlay and not reflective of the actual program restrictions.

VA-

VA home loan programs do not have any restrictions related to loan modifications. If you are being told that there is a waiting period related to a recent loan modification it is a lender overlay and not reflective of the actual program restrictions.

USDA-

USDA home loan programs do not have any restrictions related to loan modifications. If you are being told that there is a waiting period related to a recent loan modification it is a lender overlay and not reflective of the actual program restrictions.

Jumbo Home Loans-

It is much more difficult to provide an all-encompassing guideline for how all lenders will interpret a recent loan modification in the process of obtaining a new home loan. Jumbo loans are not sponsored by a Federal agency like FHA, VA, or Fannie Mae and Freddie Mac. Mortgage banks that offer Jumbo loan financing each establish their own requirements related to loan modifications. There are some Jumbo lenders that will treat a loan modification without a principle reduction without a waiting period, but for someone who was able to reduce the balance of the mortgage loan that was modified will impose a forty-eight month waiting period. There are also Jumbo lenders that do not require any waiting period from a loan modification with, or without a principle reduction.

Testimonials

“I must say I was extremely impressed with the professionalism and quick response from Chad Baker & his entire team. I screened over 5 lenders before selecting the Baker Team & boy am I happy customer. It’s evident that customer service is a priority for these folks.”

As a first time home buyer, I wasn’t sure what to really expect, but Chad and his team made the process very clear and easy. Once the process was over, they didn’t just vanish either. They kept in touch and looked for opportunities that may benefit me. A couple years later, they found me a great refinance opportunity that saved me a lot of money! Once again, the process is long and grueling, but Chad and his team made it as painless as could be. Any barrier that I encountered, they found a quick solution to make it happen. Mortgages are a huge commitment and I wouldn’t pick any other team to help me make the right decisions.”

A very responsible and experienced professional with his highly effective team

I really enjoyed working with Chad Baker and the rest of the team. This was our first time buying a home in California and we started with unnecessary assumptions based on our previous experience as home-owners in a different state. Chad and his team were available throughout the whole process, explaining the state differences, answering all our phone calls and emails quickly and directly, and providing detailed weekly status reports so that all parties including agents knew exactly where we were in the process. Chad was very experienced and provided customized loan products for us to consider, which definitely facilitated our transaction. I recommend the Chad Baker team! ”

I hope you enjoyed reading this article. It's my goal to keep you updated with the latest real estate mortgage news. I'm proud to provide you with 100% original and unique content. Subscribe now to get high quality real estate mortgage content and articles delivered directly to your inbox. Chad Baker is Regional Manager for Cross Country Mortgage. Chad is consistently recognized in the top 1% of mortgage originators in the United States 2011-2019. Got a question for Chad? Call (858) 353-8331 or submit your question online