The current economy is encouraging many homeowners to tighten their wallets. With national gas prices averaging $4.90 a gallon (up from $3.15 a year ago) and consumers spending nearly 9% more on groceries, paying a mortgage is getting tougher.
If you’re struggling to make your mortgage payment while paying your other expenses, a loan modification could help you avoid foreclosure.
What is a loan modification?
A loan modification allows you to change the terms of your current loans to avoid defaulting. Your lender must agree to grant a modification. Typically, lenders require you to show proof that you’ve experienced a financial hardship that would make it difficult or impossible for you to meet the current terms of your loan. A loan modification can change your interest rate or the loan duration to lower your monthly payment.
Homeowners who have a mortgage in forbearance may qualify for a loan modification.
Loan modification vs. Refinance
While both a loan modification and a refinance can help you avoid foreclosure, and both could help you save money each month, there are some differences between the two options.
To refinance a mortgage, you would replace your current loan with a new one with different terms. When refinancing your mortgage, you may need to seek a new appraisal and pay a loan origination fee. Refinancing your loan could lower your interest rate or lengthen your repayment term. However, homeowners can refinance to a shorter repayment term (higher monthly payments) to save on the cost of the loan or take out cash against their equity. Homeowners will need to qualify for a refinance with a good credit score, and lenders will use the house’s equity to determine eligibility.
Loan modifications do not replace your current loan. You don’t need to qualify with equity or a credit score. You won’t have to pay an appraisal or loan origination fee. Loan modifications do not allow homeowners to take out cash against their equity. A modification is simply a change in terms of your current loan.
Loan Modification vs. Forbearance
A forbearance temporarily pauses your payments, allowing homeowners to get their finances in order. Many homeowners took advantage of forbearance options during the COVID-19 pandemic when they could not work.
Forbearance isn’t meant to last long term. Lenders often require the homeowner to repay the missing payments once forbearance ends. You may be able to request that the lender adds the missed payments to the end of your loan.
Unlike forbearance, loan modification is a permanent change to your loan terms.
Pros and cons of loan modification?
If you’re behind on your loan payments and you’d like the change to keep your home, a loan modification can help you avoid foreclosure. Like all financial transactions, there are both pros and cons to choosing this route.
Pro: Loan modifications can stop foreclosure. You may be able to avoid foreclosure even if the lender has already begun foreclosing on your house. A foreclosure could significantly damage your ability to buy a new home or take out new credit for years. A loan modification could give you more time to catch up.
Con: You need to clearly understand what you’re agreeing to. Some modifications are a form of debt settlement plans. Entering into a debt settlement agreement can affect your credit score. You cannot change your mind once the modification process has started.
Pro: A loan modification would lower your monthly payments. This could make affording your home and other expenses much easier long term. A loan modification may also allow you to change an adjustable-rate mortgage to a fixed rate.
Con: Your loan will be more expensive long term. To lower your monthly payment, your lender may extend your repayment terms. An extended repayment term means you’ll pay interest on your loan for longer.
Pro: You may suffer damage to your credit score, but it would be significantly less than a foreclosure.
Con: In some cases, the lender may require that you sell the home instead of staying in the house with your new terms.
What if my lender won’t give me a loan modification?
While many lenders prefer a loan modification to a foreclosure, you may not qualify. If your lender doesn’t offer a loan modification, you have some other options.
Refinance: If you can qualify (even with a cosigner) for a refinance, this may be the best option. A refinance can save you money on the life of your loan and reduce your monthly payments.
Sell for Cash: The next best option would be to sell your home to a cash buyer, like Brick. Selling your house to a cash buyer avoids the delays that come with buyer financing. Additionally, Brick doesn’t require inspections or repairs. You could sell your home without spending time or money fixing it up.
Short Sale: In a short sale, the lender agrees to take less than what you owe on the property. Your lender must agree to the offer you accept. Your lender may agree to forgive the difference between what you owe and the price you get in the sale.
Deed in lieu: Instead of foreclosing, a deed in lieu of foreclosure allows the homeowner to turn over the title to their home and walk away. Your credit will take a hit, but it won’t be as damaging as a foreclosure. Further, you can avoid the public aspects of foreclosure by agreeing to turn over the house without posting notifications.
Foreclose: Foreclosure should be your last resort. If your lender forecloses on your house, you won’t have to repay the debt. However, your credit will take significant damage. You may not be able to buy a home for up to 10 years. Some landlords won’t even rent if you have a foreclosure on your record.
Millions of homeowners have struggled to recover from the economic shifts over the last few years. If you need to sell your house quickly, reach out to Brick. We can help you learn more about avoiding foreclosure and offer a fast cash offer for your property.