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Is Your Mortgage Unaffordable?

Loan Modification Can Solve Your Issue

A lot of homeowners have had their income affected by COVID-19 and now can’t pay their current mortgage. When there is a life-changing event such as Covid and income adjustments Loan modifications are available.

This is the process of the bank reviewing your updated income financials and seeing how they can adjust your current mortgage payment to make it affordable. 

They can do this in several ways described below

A lot of homeowners have had their income

First, they will review your current paystubs or bank statements if self-employed, and they determine what is an adjusted gross income. Your monthly payment must be within a certain percentage of that amount. This amount can vary by loan type(FHA/VA/Fannie Mae/Freddie Mac). 

The most common practice to bring the monthly payment down is by re-amortization of the loan.

Meaning they can extend the payment calculations out to 30-year payments. Let’s say you had a mortgage with 20 years left, they will reset and bring it to 30 years. In the long run, this means you essentially will end up paying an extra 10 years of interest. Therefore, banks do not mind doing modifications as it is a way for them to make more money in the long run. There also are government incentives to do so. Remember, you can always refinance when things are better for you.

Currently, at the time of this article, FHA is looking to extend the amortization on eligible Covid relief borrowers up to 40 years. VA loans already practice this.

This will alleviate a lot of monthly cash flow payments however it will cost the borrower more money in the long run, due to compound interest.

Let’s say they have adjusted your amortization schedule, yet the payment does not meet the income qualifications.

The next step is they can get a certain amount of the principal balance and put it as a balloon payment. This means that amount would need to be paid at the end of the mortgage as a lump sum, when the property is sold, or when the loan is refinanced. Now that amount does not accumulate interest, it is just part of the outstanding balance.

When the updated balance is re-amortized at 30 years (40 for VA loans proposed plan for FHA to do the same) the goal is for the payment to be low enough to meet the set income guideline.

The modification under the Covid relief program would bring the loan to today’s market rates. This can be very beneficial if you have a high-rate loan. These guidelines are set by FHA/Fannie Made/Freddie Mac/ VA who all have been directed by the White House administration’s new assistance program.

There is a possibility in a loan modification that some of the principal balance is reduced to assist in the payment amount. The combination of interest adjustment, amortization, and the balance amount will all give a lower payment to keep you in your house.

If a loan modification would not help you or get your desired payment amount to review the other loss mitigation options available to avoid foreclosure.

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