Understanding Loan Modifications: Legal Solutions & Advice

Do You Have To Pay Back A Loan Modification

If you’ve had a loan modification and want to sell your house, you can. But you need to understand what kind of loan modification you agreed to and how it can affect you when you want to sell your home. If you’ve had a loan modification on your mortgage, you’re not alone. Loan modifications have helped many people avoid foreclosure, especially after the mortgage crisis of 2008 when foreclosures hit record-breaking numbers. It’s possible to sell your house after having a loan modification, but there are some things you’ll want to look out for when you’re trying to sell. If you’re thinking about selling after a loan modification, it’s important you have an expert realtor familiar with lending procedures and loan modifications to get the most for your home and have a smooth closing with no unwelcome surprises.

A loan modification is a permanent change to the original terms of your mortgage to lower payments and give you a chance to catch up if you’re experiencing financial hardship.

Lenders will do this to avoid a foreclosure. Most lenders are more willing to change the loan terms than risk having to foreclose on your house, because foreclosures are more expensive for the lender. A loan modification is not the same as refinancing. Refinancing replaces your loan with a new loan. A loan modification changes the terms of your existing loan. A lender might lower the principal amount, lower the interest rate, change the interest rate from a variable interest rate to a fixed-interest loan, or extend the length of the loan to lower the monthly payments.

How a loan modification works

Lenders may offer loan modifications to borrowers behind on their payments or close to defaulting on their loan if the borrower can prove they are experiencing financial hardship. In most cases, to get a loan modification you must prove financial hardship such as job loss, illness, or death of a spouse. You might also be able to get a loan modification if the interest of a variable interest loan has made it impossible for you to make the payments. To apply for a loan modification, you’ll be asked to submit documentation to prove your situation. It’s up to the lender which type of modification they agree to make on your mortgage if they determine you’re eligible for the loan modification. Permanent loan modifications last for the life of the loan. In a loan extension, the loan may be changed from a 30-year loan to a 40-year loan. This will lower the payments but you’ll pay more in interest in the long run.

In an interest rate deduction loan modification, several things can happen. The lender might change from a variable interest rate to a fixed interest rate. Or the lender might lower the interest rate. This doesn’t always mean that you’re getting better terms. The lender can elect to apply the reduced interest amount to the principal of the loan on the back end you must pay later. In a principal deferral loan modification, the lender reduces the amount of the principal that is paid off with each loan payment. But when the loan matures or the property is sold, that amount of principal that the lender deferred is due. It’s important to understand what type of loan modification the lender offers you. A principal deferral, for example, could result in an additional payment or second lien when you want to sell your house that you may be unaware of. Make sure you have an expert seller agent who understands loan modifications if you’re trying to sell our house.

Common Reasons for Selling After a Loan Modification

Regardless of the reasons for selling after a loan modification, a loan modification doesn’t mean you have to stay in your house forever if you don’t want to. Some people find they are still struggling after a loan modification and want to get out from underneath their mortgage before they get behind again to avoid a foreclosure or a short sale. Others might want to take advantage of the equity they have and get a smaller house. Then again, reasons for selling after a loan modification could have nothing to do with finances. Just because folks have had rough patches in the past doesn’t mean they’re still experiencing financial hardship. Some people sell their homes because their children have grown up and they no longer need so many houses. Or their job may require that they relocate. There could have been a divorce. Or they just might want to move and try something new. You can sell your house as soon as the permanent loan modification is in effect. Your lender can’t prevent you from selling your house after a permanent loan modification. However, there may be a prepayment penalty attached to the loan modification. A prepayment penalty is a provision in your contract with the lender that states that if you pay off the loan early, you’ll pay a penalty.

A prepayment penalty can be expressed as a percentage of the principal balance or a specified number of months interest. This can result in an additional fee of thousands. For example, if you have a 3% prepayment penalty and a principal balance of $200,000, the prepayment penalty would be $6,000. Prepayment penalties usually decrease or disappear after a few years, but you’ll need to check your loan documents to make certain. Prepayment penalties were limited for some mortgages but the law is not retroactive and doesn’t apply to all mortgages.

The first thing you need to do if you want to sell your home after a loan modification is to request the payoff amount from your lender in writing. The payoff amount should reflect the total amount to pay off your loan. But it’s possible that it’s incorrect if you’ve had a loan modification. This is why once you have your payoff amount, it’s critical you work with an experienced realtor familiar with loan modifications. Some loan modifications imposed a second lien on the property that the borrower was completely unaware of.

A loan modification can hurt your credit score, but how much it affects your credit depends upon how your lender modified your loan, and what the lender reported to the credit agencies. If the lender lowered the principal balance by initiating a second loan, that amount may appear on your credit as “charged off” which can damage your credit. However, most loan modifications only appear on your credit report in the form of the late payments that you missed before getting the loan modification. Either way, both options are preferable to a foreclosure which stays on your credit for seven years. Loan modifications usually become permanent once you successfully complete a trial period of paying as agreed. Most loan modifications have a trial period of three months during which you must prove the ability to meet the new payment requirement. As long as you make the payments and you meet the eligibility requirements, the loan modification will become permanent.

You can try to negotiate a loan modification offer but make sure you’ve done your homework. You’ll want a documented long-term plan that describes how you’ll be able to meet the terms you’re proposing. If you want to negotiate because you find the banks offer unfair, such as trying to add another 30 years onto your loan, create another loan for a principal reduction, or add an outrageous prepayment penalty, engage the services of an attorney or a non-profit counselor who specializes in loan modifications. In most cases, you can get a mortgage to buy another house after a loan modification as long as you haven’t missed any payments over the previous 12 months, depending on the specifications of your lender. But you need to know how your original loan was modified. If you had any principal balance forgiveness or “write-down” on your mortgage, you may not qualify for a conventional mortgage loan. But there are other ways to get a mortgage with a low credit score. If you want to rent your home after a loan modification, you need to check the fine print of the contract you have with your lender. Some lenders could add a clause that requires you to live in the home. When the lender modified the loan, they may have stipulated owner-occupancy requirements. These requirements require the person who signs for the loan to live on the property for a set amount of time after the loan modification. One of the common ways to get help when in default is to apply for a loan modification, which will shorten your rate, lengthen your loan term (so your payments are smaller), defer part of your payment or make your loan easier to pay in some other way.
There are many reasons why someone might need a loan modification, many of them outside of the person’s control. Fortunately, there are also some smart decisions everyone can make to set themselves up for financial success while going through a loan modification and afterward. The most important thing to do is stick to a budget. Every Dollar helps you plan out and then track every dollar (get it?) you make and spend so that you can easily see how much you have and where your money is going. Regardless of your financial situation, a specific, detailed budget is the foundation on which to build your financial future.

Much of the time, big expenditures aren’t what pushes you over your budget. It’s the little things that add up day after day, week after week, until you’ve spent hundreds of dollars a month on coffee, eating out, alcohol, etc. Figure out how much you can actually afford to spend on these things and then stick to that amount. If you end up with extra money at the end of a month, don’t blow it on something fun. Instead, throw it into that emergency savings account. Also, shop around to see what services you can get for more inexpensively – like car and homeowners insurance, for example.

Your home is your greatest asset, so you should budget around your mortgage payment. The easiest way to do this is by setting up auto pay with your mortgage company. Set it for right after your receive your first check of the month so you’ll always have the funds available, and you won’t have to worry about remembering to make the payment on time. We’ve found that many people aren’t sure what to focus on when there are numerous collectors calling daily, and it’s often tempting pay the mortgage last since it’s usually the largest monthly payment. Some homeowners have used their mortgage payment funds to try to get caught up on their other debts and figured they would then have money to get caught up on the mortgage later.

Unfortunately, this often doesn’t end up working out, leaving them in a situation that’s worse than the one they were in to begin with. Another reason to pay your mortgage first is that home loan companies have the least amount of wiggle room due to stringent government regulations. There are many other resources available, like the U.S. Department of Housing and Urban Development’s Hardest Hit Fund. In terms of the worst case scenario, defaulting on – and possibly losing your home is always worse than defaulting on credit card or car debt. Again, you can find budgeting tools and tips all over the internet. This is first so that the next unexpected expense you have doesn’t push you further into debt. The second step is pay off your debt, starting with the lowest balance first. Many people will try to focus on the debt with the highest interest rate, but you should start with the smallest debt so that once you pay it off, you can put the money you were spending on that bill toward your next lowest balance. Setting up biweekly payments for your mortgage can help you even more in the long run because you have to be a little ahead with your payments in order to set up biweekly payments. The other benefit of biweekly payments is that over the course of a year, you make 26 half-payments, which is the equivalent of 13 whole payments annually instead of the 12 required payments, so you end up paying off your mortgage faster.