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AttorneyChat is a free service for Washington State homeowners. It is provided by Nadia K. Kilburn, a Washington State attorney specializing in mortgage and foreclosure issues.

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No question is too big or too small! I can help on just about any mortgage default question. If I can’t help, I will let you know and try to point you in the right direction for additional assistance.

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Loan Modification FAQs

  • A loan modification is an agreement made between a mortgage lender and a borrower where both parties agree to restructure the terms of an existing loan by executing a new loan agreement.

    With that said, the term “modification” can be a bit misleading because, once a loan modification is fully executed and recorded, the terms of the old loan become void. The loan modification process ends with a fully executed new loan with new terms, a new start date, a new maturity date and a new principal balance.

    Loan modifications are typically pursued by borrowers who have defaulted on their mortgage and are looking to resume making regular payments without having to pay everything they owe (the arrears).

  • Technically, a loan modification is a type of refinance; however, the term “refinance” gets used to refer to the restructuring of a loan that is current. A “loan modification” is often the term that gets used to refer to the restructuring of a loan that is in default.

    It can be difficult for a borrower who is in default to complete a traditional refinance of their loan because most new lenders are hesitant to approve a refinance while the borrower has a delinquent payment history. Borrowers who are both in default and want to refinance often need a loan modification first. The loan modification allows them to resume making their payments each month and will build the payment history they need to execute a traditional refinance.

    Thus, borrowers who are in default often need to modify their loans through a loan modification with their existing lender as a way to restructure the debt and resume making payments.

  • While some lenders allow borrowers to apply for a loan modification while the loan is current, most lenders require that borrowers be in default (or at risk of imminent default) prior to approving a loan modification.

    The most common time a borrower applies for a loan modification is after a period of default due to financial hardship. Borrowers find themselves in a position where they experience financial hardship, resolve the hardship but then are unable to repay everything owed. They end up in a position where they can resume making regular monthly mortgage payments but they can’t cure the default and pay the arrears in full.

    While there are different ways that loan modifications adjust the borrower’s obligations, the most common type of modification allows a borrower to resume making regular payments. The arrears get tacked on to the end of the loan, the interest rate gets adjusted and the loan term usually gets extended. Once executed, the borrower simply moves forward making monthly payments.

  • Unlike a loan modification, a repayment plan doesn’t create a new loan or change the terms of the original loan. A repayment plan is a way for a borrower to resume making their regular mortgage payments while paying a little bit extra every month toward their arrears until they are fully caught up.

    Once they have paid back the arrears and the repayment plan is complete, the monthly payment reverts back to the standard monthly mortgage payments as agreed to in the original loan documents. Unlike a modification, there are no new loan terms given at the end of the repayment period.

    Repayment plans need to be approved by the bank in writing – a borrower cannot just elect to send in a little extra every month. The bank and the borrower negotiate until they have an agreement in writing confirming the monthly amount and the duration of the repayment period. At the end of the repayment period, the loan will be brought “current” and the payment reverts back to the normal mortgage payment under the existing loan.

    • A Valid Hardship: Lenders require a hardship letter as part of the modification process. Because lenders view mortgages as important contractual obligations, they want to ensure that the reason the borrower defaulted on the mortgage was due to genuine financial hardship and not irresponsible decision-making.
    • Stable Income: Lenders view modifications as “second chances” to become current and resume making stable payments. Lenders do not want to be in a position where they offer the borrower a modification and then have to deal with another default shortly thereafter.
    • Affordability of the modified payment: As you know, a modification is a way for a borrower to resume making regular payments without having to cure the arrears at once. Most of the time, modifications will produce payments very close to the original payment that the borrower was making prior to the default. While modified payments do drop on occasion, it’s typically not a meaningful drop, so the lender reviews the household income to see if the borrower is bringing in enough money to support resuming regular mortgage payments.
    • Whether the borrower can afford a lump sum payment or be put on a high repayment plan: Lenders always want to be paid back in the fastest time possible with the least amount of restructuring. Part of the modification review process is to vet the borrower’s income to see whether there is enough money coming in (and so few expenses going out) that the borrower could handle a repayment plan instead of a modification. Sometimes, repayment plans require a lump sum cash payment up front. Often, repayment plans have high payments, as they will always exceed the regular mortgage payment amount. If the borrower reports few expenses and high income such that there is a large surplus between the expenses and the income, some lenders will approve a repayment plan instead of a modification even if the borrower asked for a modification.
    • Whether the borrower has had any prior modification attempts: Different lenders and investors have different guidelines when evaluating the below factors. How these get applied vary based on lender and investor. The below are three general factors that lenders consider during loan modification review:
      • How many modifications the borrower can receive over the life of the loan:  Some investors restrict the amount of modifications a borrower can have for the duration of the loan. Restrictions range from 1 – 3 modifications total over the life of the loan.
      • Whether the borrower can get another modification if they defaulted on a prior modification: If the borrower received a modification from the lender and then defaulted shortly after, the lender may restrict the ability to re-apply again or may make the borrower wait a certain amount of time before they can apply again.
      • Whether a borrower can qualify for a modification if they defaulted on their original loan shortly after it was originated: Some investors prevent borrowers from receiving a modification if they defaulted within the first few months of their original loan.
  • For borrowers who go through the loan modification process with the Federal Housing Administration (FHA) as the investor on their loan, borrowers may be offered a partial claim as part of their final loan modification agreement.

    A partial claim is a non-interest bearing subordinate note payable to HUD (at the maturity date of the first mortgage) that gets recorded similar to a 2nd mortgage on Title. FHA is allowed to take up to 30% of the principal balance owed to create a partial claim. Partial claims are a way for FHA to defer an amount due at the maturity date of the first mortgage as a way to help the borrower complete the loan modification.

    Note: Partial claims are also being offered as a way to handle borrowers needing to transition away from COVID forbearance plans.

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