What Is A Loan Modification?

A loan modification is when the current mortgage lender will restructure the homeowners current mortgage loan or add the delinquent payments of the mortgage payments that the homeowner has been delinquent to the back of the mortgage loan balance so the homeowner can afford the mortgage loan payments and will be able to keep and stay in their home instead of facing foreclosure. Loan modifications used to be very popular right after the 2008 Real Estate and Mortgage Collapse where homeowners with upside down mortgages lost their jobs and/or businesses and could not afford their mortgage payments. Mortgage lenders often offered loan modifications to homeowners who could prove their financial hardship but yet would be able to afford their mortgage payments as well as other monthly expenses.  A homeowner can qualify for another home loan after loan modification. However, to qualify for another home loan after loan modification, there are mandatory waiting periods to qualify for home loan after loan modification depending on the type of mortgage loan program. On this article, we will discuss qualifying for home loan after modification for FHA Loans and VA Loans.

How Can A Homeowner Qualify For Loan Modification?

Homeowners who have had periods of unemployment, loss of business, medical issues, divorce, or other extenuating circumstances where they had their steady flow of income disrupted and fell behind on their mortgage and are on the verge of foreclosure, can possibly qualify for a home loan modification.  Homeowners who had a sudden change of circumstances such as a loss of employment, are undergoing a divorce, or other issues should contact their mortgage lender prior to defaulting on any mortgage payments. Mortgage lenders do not want your home and do not want to foreclosure on your home. Mortgage lenders want to work with you and do understand that extenuating circumstances do happen and can offer you a mortgage workout plan and/or loan modification plan. To qualify for a loan modification, the homeowner needs to be employed full time with the ability to repay the mortgage. Many times it will be near impossible to pay back the mortgage payments that are behind so on a loan workout, the homeowner will pay the same mortgage loan payments as before but the amount that the loan payments that fell behind will be added back to the mortgage loan balance. This is not a loan modification but rather it is called a loan workout. On a loan workout, there is no waiting period to qualify for home loan after loan modification because there was no loan modification. The homeowners current mortgage lender will want to see the homeowner’s financials which includes bank statements, paycheck stubs, tax returns, and complete a loan modification worksheet. Again, to qualify for a loan modification, the homeowner needs to show that they are employed full time. The mortgage lender will then look at the homeowners financials which includes their income and expenses and decide on the maximum home expenses the homeowner can afford. Once the mortgage lender has determined the maximum housing expenses, the mortgage lender will determine whether or not the homeowner can qualify for a loan modification and if the current mortgage payments the homeowner is paying is too much, the mortgage lender will determine a lower amount of the new mortgage payment the mortgage loan borrower can afford. This can be accomplished by the mortgage lender lowering the mortgage rates to a lower rate than the original mortgage rate or the mortgage lender may decide to discount the original mortgage loan balance and take a loss and restructure the mortgage loan. The mortgage loan modification process is a process and may take many months. Once a settlement has been reached, the mortgage loan borrower will have their mortgage loan modification finalized and will start making their mortgage payments with the new agreed mortgage payment.

Qualifying For FHA Home Loan After Loan Modification

Homeowners who had a loan modification may decide to sell their home that they had the mortgage loan modification done and purchase a new home. If the homeowner who had a prior mortgage loan modification done decides to sell their current home and purchase another home with a FHA Loan, then there are mandatory waiting period to qualify for FHA Home Loan After Loan Modification. To qualify for FHA Home Loan After Loan Modification, there is a one year waiting period after the loan modification and proof of 12 months timely payments to the mortgage lender after the home loan has been modified. There cannot be any late payments after the home loan modification. Mortgage lenders want to not only see timely payments on the borrower’s mortgage payments but all of other monthly debt payments be paid timely in the past 12 months.

Qualifying For Conventional Home Loan After Loan Modification

Qualifying for conventional home loan after loan modification requires a waiting period of four years after the loan modification if the mortgage loan has been restructured. Fannie Mae and Freddie Mac defines a restructured mortgage loan as a home loan in which the original terms and conditions has changed by the mortgage lender either by the mortgage lender forgiving part or all of the mortgage loan balance or if the mortgage lender had to restructure the original mortgage loan debt by modifying the original mortgage loan to a new mortgage loan by reducing the mortgage interest rate and by reducing the monthly principal and interest payments so the homeowner can afford to pay the mortgage payments and stay and keep their home. Here are some types of examples of restructuring a home loan through loan modification:

  • The mortgage lender will forgive a portion of the principal or interest  or combination of both on either the first mortgage loan balance and/or second mortgage loan balance.
  • Application of a principal curtailment, except as permitted by policy.
  • Converting  any portion of the original mortgage loan debt to a “soft” subordinate mortgage.
  • Converting any portion of the original mortgage debt from secured debt to unsecured debt.

The mortgage loan borrower can qualify for a conventional home loan after modification 48 months have passed since the restructuring of the mortgage loan modification has occurred with no late payments on their mortgage payments for the past 24 months.

If you have a mortgage loan modification and need to apply for a home loan after loan modification, please contact Gustan Cho Associates at 262-716-8151 or email Gustan Cho at gcho@gustancho.com.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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