When you modify your mortgage there are several things to remember. The most important is to be completely candid with your lender about your financial situation. If you honestly look for help and are serious about fixing the problem, you will find help to continue your mortgage and save your home.
- Your credit will be hurt
- It will stop foreclosure if you apply early enough
- You will be able to apply for other loans after you clean up this financial problem
- It is not a second mortgage
Having to modify your mortgage is not the end of the world. Many people need to do this when they suffer a financial crisis. The important thing is to reach out to your lender before you get too far behind on payments while there is still time.
Does a Loan Modification Affect Your Credit?
A loan modification will negatively affect your credit. Any time that you fall behind on your payments your credit will be hurt. How much your credit is impacted in the short term depends on the terms of your loan and how many payments you missed. However, the longer you wait to take steps to correct the situation the worse your credit will be hurt long-term.
Short-Term Credit Implications
How a loan modification affects your short-term credit depends on the terms of your agreement. If you are already behind on payments your credit scores will go down. Therefore, you must negotiate the best possible solution to your problem.
- Most lenders will not modify a loan unless you are already behind on your payments
- Lenders may or may not report your agreement as a settlement to credit bureaus
- Your bank should list your trial period payments as current, but on a modified schedule.
As you can see there are a lot of gray areas that will impact your short-term credit. The earlier you go to your bank and negotiate an agreement the less your credit will be hurt.1
Long-Term Credit Implications
How a loan modification affects your long-term credit not only depends on the terms of your agreement but also your candor about your situation and your diligence about making payments.
- If you negotiate favorable terms then you will see less damage both short and long term
- You must not fall behind on payments for your newly modified loan
No matter what agreement you make it will be better in the long run than missing payments and losing your house to foreclosure. Beyond that, making sure that you keep up with your payments is critical to your credit.
Does a loan modification stop foreclosure?
A loan modification will stop foreclosure. However, if you wait until the last moment then the bank will not accept your application.
- The sooner you start the process the more likely it is that you will be approved
- If you wait too late then the bank will not approve your application.
- You do not need good credit to qualify
The lender will do what is in his/her best interest. If you wait too long or demonstrate that you are too unreliable then it is a better option for the bank to foreclose. Remember, that if you want to save your house then you must demonstrate that you will repay your loan, and you are a better investment than a foreclosure.
Can I get a home equity loan after a modification?
Having a loan modification will affect your ability to get a home equity loan. It will be more difficult for you to get a HELOC, but how much more difficult depends on a number of factors.
- Most banks require that you be current on at least 12 months of payments after a loan modification on any type of loan
- The terms of your loan will affect your application
- Home equity loans are riskier loans for banks so they will look closer at your payment history
If you went through a difficult financial situation and had to modify your loan, your credit and ability to get a loan will not be permanently damaged. Sometimes you just have to wait a while before you try to get another loan. Alternatively, you may try getting a loan from a different bank.
Is a loan modification a second mortgage?
A loan modification is not a second mortgage. The modification does not add another loan to your portfolio of debt. It simply restructures your existing debt.
- A second mortgage is a completely different loan than your first mortgage
- A loan modification restructures an existing loan
If you are behind on your home payments you should talk to your lender about applying to restructure your existing debt. Do not take out a second mortgage on your property.
The prospect of losing your home can be a frightening thought. It is important to remember that if you start to work with your lender as soon as you know you have a problem there are many solutions, including refinancing and modification. Your lender would rather find a way to keep you paying your loan than take your house.