If you completed a loan modification in the past, you’ll need to meet certain credit thresholds to get a green light for a new loan. What to know…
What Is A Loan Modification?
A loan modification also known as a restructured mortgage is a loan in which the original terms of the transaction changed resulting in the restructuring of the debt through a modification of the original loan or origination of that loan that results in any one of the following scenarios:
• Forgiveness of any portion of the principal balance or interest on either a first mortgage or a second mortgage (equity line for example)
• Any principal curtailment on or behalf of the mortgage loan creditor/investor to offer principal forgiveness
• Any conversion of any portion of the original mortgage loan debt to a soft subordinate mortgage or a silent second
• Any conversion of any portion of the original mortgage loan debt from secured to unsecured.
The most common forms of loan modifications had to do with rate and payment restructuring when borrowers were unable to refinance. Another common strategy for mortgage companies was to offer principal curtailment and rather than forgive debt. The difference was repositioned as a lien on the home in the form of a silent second mortgage, which did not come into play until the home was refinanced or sold.
It is important to note a loan modification is different from refinance. A loan restructuring changes the terms of the original mortgage where a refinance pays off the original mortgage loan in exchange for another. Most homeowners these days need not seek loan modifications, because they now have equity coupled with more loan program offering i.e. HARP 2. Most banks are not promoting loan modifications anymore as the economy has shifted tremendously from just a few years ago where people were climbing out of the recession from being underwater on their homes. However while the popularity of loan modifications have dropped, the wounds remain for these homeowners with credit stain from a previous restructuring.
The Low Down
If a modified mortgage is in your past then these rules apply:
24 months -of timely mortgage payments must have been made on that mortgage after the restructuring was completed. It is this black-and-white. Even if there was a second mortgage in place that was restructured, this same waiting time remains in place. This applies to a primary home, a secondary home or an investment property.
Separate Property– If you are purchasing or refinancing another property independent of the property that has a restructured loan a one-year waiting time frame applies.
If your previous loan modification contained a forbearance, a period of time where you did not make a mortgage payment for whatever reason and the additional interest was tacked onto the principal balance of the mortgage at the time the restructuring was completed or if there was a principal balance forgiveness, it’s going to be up to the individual mortgage company to make that ‘sign off’. Generally, mortgage loan companies frown on this even if you have met the twenty four month or twelve month requirement depending on your individual circumstances.
Should Your Loan Be Refinanced Or Modified?
If your mortgage loan servicer is offering you a lower monthly mortgage payment make sure it is a bona fide refinance offer, not simply just doing you a favor because you a customer. Do not be fooled, banks always have a profit motive. If you are the slightest unsure as to whether or not the loan offer you’re receiving is a loan modification or refinance, be smart, get it in writing.
The best outcome to remain creditworthy is refinancing when compared against pursuing a loan restructure. If refinancing is not an option, perhaps due to home equity for example or a heavy debt load and loan modifying is an option with your current loan servicer, know that you’re going to be limited on your future mortgage options for 1 to 2 years. Additionally, lenders are required to report modified/restructured mortgages on the tri-merge credit report mortgage banks use to make credit decisions. This is how banks pick up on red flag derogatory credit events, via a financial services credit report. Even if you didn’t have any missed mortgage payments, a restructured mortgage can still be a red flag from a credit reporting perspective. More than likely will not hurt your credit score, but it may hurt your mortgage eligibility.
Are you’re trying to get a mortgage, but have a previous loan modification in your past preventing you from qualifying? Give us a shot. Begin by getting a complementary mortgage rate quote for your refinance or home purchase today.