After the financial crisis of 2007-2008, which was primarily driven by a collapse in housing and mortgage markets, many homeowners found themselves in serious trouble. In response, Fannie Mae and Freddie Mac introduced loan modification programs to restructure mortgages broadly. These programs allowed borrowers that were behind on their mortgage payments or couldn’t refinance into lower rate loans because their homes were underwater (worth less than the mortgage) to adjust the terms of their mortgages to save their homes.
Now, almost a decade later, most homeowners have recovered financially, and their home values have bounced back too.
If you are one of the millions of homeowners that did a loan modification you might be thinking about refinancing that modified mortgage or getting a mortgage on a new home. Unfortunately, many borrowers are confused as to whether or not they can refinance or get a new mortgage after their loan modification.
Let’s help clear the air with a review of loan modifications and your options post-modification.
What is a Loan Modification?
A loan modification is any change to the original terms of a mortgage that resulted in the restructuring of any of the following characteristics of that loan: principal curtailment, forgiveness, forbearance, payment reduction or any other change in the original terms of the loan note.
After a Loan Modification, Can I Get a New Mortgage?
The simple answer is, “Yes.” You can refinance your modified mortgage or get a new mortgage following a loan modification. There are just a few requirements to convince a lender that you are back on your feet and ready to take on a conventional mortgage under the new terms.
Most conventional mortgage guidelines require that you have 24 months of good payment history on the subject property (refinance) from the date of the loan modification or 12 months of good payment history if you are trying to purchase (finance) a different home.
The next question is whether or not your mortgage holder reported the loan modification to the credit bureaus. If your loan modification was reported, then the mortgage on your credit report will probably say something like ‘restricted or modified mortgage.’ If not, you might have been given a bit of a gift assuming everything else is in line for you to qualify to refinance or get a new mortgage.
You should be checking your credit report and score on a regular basis, by the way. If you haven’t reviewed your credit recently you should probably do that before you go to much further in pursuing a mortgage. Lenders are very focused on the credit report, for obvious reasons, so make sure you know all of the ins and outs of yours.
The easiest and fastest way to check your credit report and score is to get it free from Credit Sesame.
Is There a Waiting Period After Modification?
Ironically, unlike bankruptcies and foreclosures, there is no ‘waiting period’ per say before you can refinance or qualify for a new mortgage after a loan modification.
However, there are often several challenges to be overcome to get a mortgage after a loan modification. As mentioned above, there is a requirement to have 24 months payment history to refinance a loan modification or 12 months of payment history for a new mortgage. Also, many mortgage lenders will have additional ‘lender overlays’ that
At the end of the day, your mortgage lender will require that you don’t have any late payments post-modification and you have re-established your credit.
Why Might You Want to Refinance a Loan Modification
There is a good possibility that staying with your current loan modification is the best path forward, but it’s worth comparing the potential benefits of getting out of your modified mortgage. Here are a few of the reasons you might want to consider refinancing or getting a new mortgage:
- Your home is now worth more, and you want to leverage that equity for a home improvement(s) or to pay off other high-interest debt that you might have accumulated during leaner times.
- You want to reduce your term so that you don’t have a mortgage payment well into your retirement and future years when you will be required to live on a fixed income.
- You merely want to sell and upsize or downsize from your current home
Getting a new mortgage or refinancing your current modified loan after a loan modification might be a smart move. Finding out for sure is as simple as reaching out to one of our licensed loan officers at Velocity Lending and letting us review your specific situation.