If you’ve ever been significantly behind on a mortgage then you’ve probably been offered a loan modification by your mortgage servicer. They tell you that it will lower your monthly payments and stop phone calls demanding immediate payment of your mortgage. It’s true, a loan modification can make your monthly housing payment more affordable. But there are many different aspects of a loan modification that are not favorable for the borrower. A loan modification is the restructuring of an existing mortgage with the current mortgage servicer, it is not the same as a refinance which involves paying off the original loan and taking out a new one. There are many different ways a loan can be modified and the majority of them can have a negative impact on your financial health as a borrower. As a faith-based lender, we educate our borrowers about the different mortgage products tailored to their unique situation and help them refinance out of their current modification.
One way lenders modify a mortgage is by extending the term of a loan to 40 years. Amortizing a loan for 10 more years decreases the mortgage payment because the original 30 year mortgage is now being paid over 40 years or 120 additional months. This might sound like a good deal but lenders often charge a higher rate or even an adjustable rate to modify a mortgage and keep the borrower paying their debt rather than foreclosing. If you borrowed $100,000 at 5% over a 30 year term, your monthly payment would be $536. If you borrowed $100,000 at a slightly higher rate of 5.25% over a 40 year term, your monthly payment would be $499. You would be paying $46,000 of additional interest after modifying to a 40 year term. Is a savings of $37 a month worth paying 10 additional years of mortgage payments and the accrued interest? Some borrowers now paying their mortgage over a longer term are able to get back on their feet and make their payments on time for a few years despite paying more interest over the long haul.
Here at Fellowship Home Loans we believe that once a borrower has made on-time payments for at least two years, one of our licensed Loan Officers should look over their loan to help them avoid the pitfalls of a modification.
Although the most common loan modifications have to do with rate and payment restructuring, another common strategy among many is for mortgage companies to offer principle deferment. A loan modification using deferred principal is also known as “forebearance”. Unfortunately some borrowers make low payments for a period of time before having to pay a large balloon payment or risk losing their home. As an honest lender, we want nothing more than to help people save their homes by avoiding a balloon payment. When balloon payments are not structured into the modification, the deferred balance will remain positioned as a lien on the home in the form of a silent second mortgage which will not come into play until the home is refinanced or sold.
To qualify for a modification in the first place, you need to miss a significant amount of payments which can have a devastating effect on your credit scores and impact your chances of refinancing in the future. If you haven’t missed any mortgage payments and have a shortage of cash every month, your current lender will tell you that you must be in default before qualifying for a modification. Missing multiple payments solely to qualify for a loan modification should never be an option. This could backfire if your application for a loan modification is denied. With late mortgage payments on your credit report it is extremely unlikely that you will qualify for a refinance or any other type of financing until you have a solid history of on-time payments.
For the next few years you will have poor credit with multiple late payments reporting on your credit report. You will pay higher interest rates on anything you finance, including car loans and credit cards because lenders will perceive you as a risk. Even if you do qualify to modify your loan, the collateral damage from missed payments will affect your financial future in many ways. For some, a loan modification is the last step before foreclosing on their home. But in order to avoid the dangers of modifying your loan, you must manage cash flow carefully and look for favorable refinancing terms before falling victim to the loan modification. If you are currently in a modified mortgage please call us at Fellowship Home Loans so we can look over your modification agreement and help you save money. God bless!