One of the challenges many homeowners faced in the recession was financial hardships. Loan modifications were often a short-term solution banks offered for homeowners facing delinquency, income changes or loss of home equity. If you have a loan modification but want to move and buy a new home, here's what you need to know about getting a new mortgage.
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: principal curtailment, forgiveness, forbearance, payment reduction or any change of terms from the original loan note. (Check out this mortgage glossary to get a better understanding of some of these terms.) Each loan modification is different, but the most common form involved simply a reduction in the mortgage payment.
Important timeline details
Generally, conventional mortgage loan guidelines require you have 24 months of payment history on the subject property (the property you want to get a new mortgage on) since the date of the modification, or 12 months of payment history if you trying to finance the non-subject property. Put another way, if you had a loan modification on a house 12 months ago, but are looking to finance another property, you should be in the clear. If you had a principal balance forgiveness, also called a write-down on your mortgage, you'll most likely be ineligible for most conventional mortgage loans. If your loan payment was reduced only, and you have the 12 months or 24 months rating, depending on your financial situation, you're more than likely eligible for financing again. (You can read about mortgage refinancing guidelines here.)
Was your loan modification reported?
The mortgage holder that did the modification will typically report 'restructured or modified mortgage' on your credit report. In the event you have a modified mortgage, but the credit report does not indicate so, this could be beneficial, as lenders work off the credit report. (To see how the loan modification is affecting your credit score, you can get a free monthly credit report summary on Credit.com.)
You need to provide a copy of the original modification terms specifically detailing the modification if you have a modification in your past to lenders. Some lenders who provided loan modifications to borrowers have different interpretations of what Fannie Mae and Freddie Mac consider to be a modified or restructured mortgage.
This is something that can work in your favor. Most, but not all loan modifications, involved signing new paperwork detailing the specifics of the loan restructuring with a mortgage loan servicer. If your loan was changed, but you did not sign any paperwork, your loan may report normally to the credit bureaus, wherein documenting the loan modification wouldn't be necessary and you may avoid the waiting time.
Most banks that originate, bundle and sell loans to the secondary market operate off the same guidelines regarding waiting times. In many situations, bigger banks have investor overlays that add another layer of inspection to a loan that may not necessarily need it, but is in place to insure less-risky loans. If you've been turned down before, based on the previous loan modification situation, you owe it to yourself to get a second opinion. Mortgage banks that deal directly with Fannie Mae and Freddie Mac may be more viable source for securing a loan.
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