How Loan Modifications Differ from Refinancing

Is it becoming difficult to make your mortgage payments on time? Or have you already fallen behind? If so and you’re trying to avoid foreclosure or a short sale, chances are you’ve thought about refinancing. As you consider your options, keep in mind that given the current state of lending, refinancing is usually only an option for borrowers with near perfect credit. For everyone else, approval is difficult.

With the U.S. government’s recent takeover of both Freddie Mac and Fanny Mae, there’s been a slowdown of mortgage lender initiated foreclosures. Short sales are being stopped by banks that are now attempting to negotiate loan modifications instead. This alternative allows homeowners to hold onto their homes even though they may not be able to make their mortgage payments. In other words, homeowners now have some hope of saving their homes in these times of financial chaos.

Under a loan modification, a homeowner asks its lender to consider changing the terms of the existing mortgage. A homeowner’s record of making late payments, a homeowner’s desire to do away with variable interest rates, and a homeowner’s desire for more affordable monthly payments are all reasons a homeowner can approach the lender directly and request this type of relief. 

Before considering a loan modification, understand that the program is very different from refinancing programs. Most people refinance as a way to tap into their home’s equity. Using that money, they can pay down debt or use it most anyway they choose. When refinancing, homeowners must apply and be approved for a new mortgage. That’s why it’s usually only applicants with very high credit scores who are good candidates for refinancing. Included in the refinance process are the typical loan closing costs such as points, title search and insurance fees, application fees, and more. There may or may not be a change to a fixed rate, and there’s no guarantee the monthly payments will change, either.

However, with a loan modification, you are changing one or more of the terms of an existing loan. It is usually a short term change designed to help a borrower regain sound financial footing or at least survive the unpredictable housing market. The types of modifications that can be made to a loan include lowering the interest rate for some number of years, or switching from an adjustable to a fixed rate mortgage. Your lender may offer other modification options as well. What’s especially attractive about a loan modification is the fact that your credit score is never considered nor is your score affected by any modifications.

Any homeowner can initiate the loan modification process by making a request directly to the lender. Because the implications of the modification can be confusing and the process frustrating and lengthy, it’s advisable to enlist the help of an attorney or law firm with experience in the loan modification process.