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Some Homeowners May Be Able to "Refinance" With Loan Modifications

Beth Orenstein
LoanBiz Columnist

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Many homeowners facing foreclosure hope to refinance their loans, make their payments and keep their homes. Refinancing a mortgage requires starting over and paying all the closing costs--such as application fees and title insurance--again. Some homeowners might be eligible for an easy home refinance or loan modification. A loan modification is a change in the terms of the loan--the interest rate, the length of the loan, and/or the monthly payment amount--when a borrower, because of a hardship, cannot meet the original terms. Dan Harris, who wrote the book "How To Modify Your Mortgage" and operates Harris Capital Management and Mobil Settlement, LLC in New York, says a loan modification boom is under way as more strapped homeowners learn about this alternative to refinancing.

Those Who Keep Loans on Books Most Likely to Agree to Loan Modifications

However, not every mortgage can be modified, says J. David Motley, president of the mortgage production division of Colonial Savings of Fort Worth, Texas. Indeed, probably most cannot, he says, because the lender that originated the mortgage has likely sold it to investors and no longer owns it.

The only institutions that are apt to modify mortgages are portfolio lenders, Motley says. A portfolio lender is one that keeps loans on its books rather than sell them on the secondary market. Colonial Savings sells most of its mortgages on a "servicing retained" basis, meaning that it performs collection activities, manages the borrower's escrow account for taxes and insurance, and remits proceeds to the ultimate note holder. However, Harris says, he has had success with securitized loans as well as portfolio loans.

Borrower Must Prove Need for Refinance Alternative 

A loan modification requires some work and time. It can take as long as three or four months to complete.  Help from someone who specializes in loan modifications makes it easier, says Harris, who has worked with a number of lenders and servicing companies.

One of the biggest hurdles is finding the department or employee with the authority to modify the loan and work with the borrower. It can require persistence to find that person. Modifications are generally handled in the servicer's collection or loss mitigation department.

Applicants for Loan Modifications Must Have a Good Reason For One

For this refinancing alternative to work, the borrowers have to prove a hardship. Hardships that lenders consider acceptable include an adjustable rate mortgage that is resetting to a much higher payment, the death of a spouse or co-borrower, damage to the property from a natural or unnatural disaster, a divorce, or a failed business. Other hardships that are likely to qualify include a serious illness, the loss of a job, military duty, or reduced income.

Lenders Want Proof Borrowers Can Make Reduced Payments

Borrowers also must demonstrate that they will be able to make the new reduced payments once the modification is agreed to, Harris says. The borrower will likely be asked to supply recent pay stubs, income tax returns, and bank statements.  In general, borrowers who qualify for a loan modification will have a debt-to-income ratio based on the modified terms of around 40%, Motley says.

Streamlined Refinancing Another Option

Struggling borrowers whose lenders won't agree to a loan modification might try for a streamlined refinance. The borrower will pay fees for streamlined refinancing, but the lender might be willing to forgo a credit report or appraisal, which can save a few hundred dollars as well as time.

Sources:
  • Harris, Dan, Interview by Beth W. Orenstein, 20 October 2008
  • Motley, David, Interview by Beth W. Orenstein, 24 October 2008
  • U.S. Department of Housing and Urban Development
  • Beth W. Orenstein, of Northampton, Pennsylvania, is a freelance real estate writer.

About the Author
Beth W. Orenstein, of Northampton, Pennsylvania, is a freelance real estate writer. A graduate of Tufts University, she majored in English.

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