A home loan or mortgage modification is a useful plan for homeowners who are having difficulty paying their mortgage payments. Borrowers who qualify for loan modifications have often missed their monthly mortgage payments or are at risk of missing their payments.

Here’s what you need to know to get a home loan modification and stay in your home.

What is a mortgage modification?

Changing your mortgage can help you avoid closing, temporarily or permanently, by adjusting the duration of your loan, going from an adjustable-rate mortgage to a fixed-rate mortgage, lowering the interest rate, or all of the above. Unlike mortgage refinancing, loan modifications do not replace an existing mortgage. Instead, they change the original loan.

Mortgage lenders with Fannie Mae or Freddie Mac could take advantage of a flexible modification, which allows lenders to lower the interest rate or extend the term of the loan (which reduces the amount of the monthly payment but does not change the amount owed).

For homeowners struggling with the coronavirus pandemic, the loan modification can help you reduce your monthly payments to fit your current budget. Those who are already in arrears can apply for a change once the default is over if they still need mortgage help.

Under the CARES Act, borrowers with federal loans are entitled to a lien of up to one year. While most home loans meet the requirements for this type of employment, approximately 14.5 million home loans are not covered because they are privately owned.

However, not all lenders offer loan modifications, even those home loans that are covered by the CARES Act employment provisions. So be sure to contact your lender to establish a viable plan (whether violence, modification, or anything else) that will prevent you from paying off your loan.

Who qualifies for a loan modification?

Borrowers with financial difficulties may, for various reasons, opt for a loan modification; however, the eligibility requirements are different for each provider.

Some lenders require a late or missed mortgage payment or an imminent risk of missing a payment to qualify. Lenders will also want to assess what caused the hardship and whether a change is a viable path to affordability.

In other words, if you lose your job and have no income anymore, one change may not be enough to get it back. However, if you start earning less (due to a job change or other factors), you may still be able to make regular payments, but only if you can lower your monthly cost.

There are several reasons why people can no longer pay their current mortgage payments, which could qualify them for a change. Lenders are likely to request a hardship test. These reasons include:

• Loss of income (due to a decrease in salary or death of a family member)
• Divorce or separation
• Increased housing costs
• Natural disaster
• Health pandemic
• Illness or disability

If you are experiencing financial difficulties, be sure to speak with your lender right away. Find out if you qualify for a loan modification, according to its rules, and if this solution makes sense for you.

How to modify your mortgage loan?

There are several ways your mortgage lender can modify your home loan, from lowering your interest rate to extending your mortgage to lowering your monthly payments.

Lower the interest rate

Lowering the interest rate can cost hundreds of dollars in monthly mortgage payments. A $ 200,000 mortgage with a 4% interest rate on a 30-year fixed-rate loan is about $ 955 per month, compared to the same loan with a 3% interest rate, which equates to $ 843 per month.

This is similar to loan refinancing, but the difference is that you don’t have to pay any closing costs or fees.

Lengthen the term

Another strategy that lenders use to make monthly payments cheaper is to extend the loan term. For example, if you have a $ 100,000 mortgage at a 4% interest rate with 15 years left, you would pay $ 740 a month. If you extend that loan for 10 years, you will pay $ 528 per month. Keep in mind that you will pay more interest over the life of the loan if you extend it.

Change from an adjustable-rate mortgage to a fixed-rate mortgage

It may not reduce your existing payments from a transition from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, but it can help protect you from rising interest rates along the way…

Because ARMs have floating rates, they are changing with the market. For example, if your interest rate is 3.5% and your average rate rises to 4%, so will your interest rate. This can be bad news if you are in a growing environment. By setting your interest rate, you are guaranteed to pay the same interest rate over the life of your loan, regardless of what the market does.

Enter mainly late fees

If you have previously accrued overdue charges on things like interest, postpaid fees, or a security deposit, some lenders will add it to your principal balance and cancel the loan. This means that the amount due will be distributed over time to the new balance. If you extend the term of the loan, you may have to pay less in monthly installments even though you owe more to your principal.

Reduce the primary balance

In rare circumstances, lenders will reduce the amount owed, also known as a major change. These were common during the housing crisis, when loan standards loomed and home values ​​fell, causing many mortgages to flood with their mortgages.

If a lender decides to reduce capital, it probably depends on the current local housing market, what you owe and the loss you would suffer if it went this way compared to closing.

All or part of the above

Some borrowers may need a combination of actions to manage their monthly mortgage bills. Depending on your needs, a lender can lower the interest rate and extend the loan so that the monthly payment can be reduced in two ways, without contacting the principal balance.

The lender will likely go through a cost-benefit analysis to assess a rate that makes sense for both parties.

Will a change in my mortgage damage my creditworthiness?

If the change is approved by the federal government (i.e. owned by Freddie Mac, Fannie Mae, VA, FHA, or USDA) and is the result of the coronary heart virus, no credit reporting institutions will be notified under CARES law.

Otherwise, you may be notified of some loan changes such as settlements or reviews, which could hurt your credit. Be sure to talk to your lender if their policy is to announce changes. However, a loan change is not as harmful as a foreclosure.