Loan modifications and foreclosures
Everyone experiences hard times now and again. Sometimes, tough economic times can result in scary outcomes, such as the threat of your home being taken away.
If you’ve fallen behind on your mortgage payments, your lender can initiate a foreclosure to take back their asset. If you don’t act quickly to prevent foreclosure with a loan modification, you could soon find yourself without a place to live.
Babi Legal Group has more than 10 years of experience helping people stop foreclosures and negotiate loan modification agreements. We have years of experience working with banks and know the ins and outs of home loan modification laws.
In this article, we’ll discuss loan modifications and mortgage forbearance, as well as the impact of the CARES Act on these things.
What is a Mortgage Loan Modification?
Banks are not in the business of owning homes. At the same time, they obviously don’t allow their borrowers to live in homes without paying for them.
That’s why loan modification programs were created — to allow the homeowner to make up for missed payments and prevent the bank from foreclosing on the home.
A mortgage loan modification is an agreement between the mortgage company and the borrower that results in a restructured loan that makes it more affordable for the borrower to pay. Depending upon your situation, there are a number of ways a loan modification can be done.
Lenders know that people can experience temporary financial hardship due to a divorce, a major world event such as COVID-19, medical issues or a loss of income, for example. Most lenders will be amenable to devising loans to stop foreclosure because, as mentioned, they ultimately don’t want your home back.
Can You Be Denied a Loan Modification?
While lenders are often amenable to helping their borrowers, there are no loan modification laws that require them to do so. Just because you apply for a loan modification doesn’t mean you will automatically be approved.
Your lender may deny your application for a modification for any number of reasons, including their determination of your ability to re-pay the modified loan, providing incorrect information or not providing required documentation in a timely manner.
Loss Modification After Foreclosure
If you don’t act quickly enough, and in the right fashion, you could end up foreclosed on by your lender. If your situation gets to this point, your options are generally pretty limited — at least when dealing with the lender directly.
Once your home has been foreclosed on, a loan modification is no longer a viable option. In this scenario, Babi Legal can help you challenge the validity of the foreclosure through the court system, something we have successfully done in the past for our clients.
This may allow you to prevent the foreclosure from becoming official and allow you to keep your home.
Can Loan Modification Stop a Foreclosure?
One of the most common questions borrowers ask is, “does loan modification stop foreclosure?” The answer is maybe.
It depends a lot on your specific situation, the lender you’re dealing with and the timeliness of your efforts. In the experience of the attorneys at Babi Legal Group, most lenders will be willing to postpone a foreclosure sale if a loan modification is under review for a final determination.
The challenge is that most modifications can take anywhere from 30 to 120 days to complete. It may take a full month just to get to the review stage of the process. That’s why it’s essential that you start the process of loan modification as soon as you possibly can.
Loan Modification Programs
Each private lender will have different options for loan modification. If you find yourself in need of help to avoid foreclosure, you can reach out directly to your lender to see how they’re willing to work with you. However, they have no obligation to approve you for a loan modification and will only advise you of the documentation you need to provide.
The federal government offers a number of loan modification programs for borrowers who have a mortgage backed by the FHA, USDA or VA, for instance. Check with the federal agency that backs your loan to see what steps you’d need to take.
The state you live in also may offer specific programs to help you avoid foreclosure. Michigan, for instance, offers an interest-free loan through the Step Forward Michigan Program. Although this is not a loan modification, it’s another avenue of assistance that may help homeowners stay in their homes if they have experienced financial hardship.
The Michigan State Housing Development Authority also offers a number of resources and guides to homeowners in the state.
What Do You Need to Get a Mortgage Loan Modification?
Just like when you apply for a mortgage to purchase a home, your lender will want to analyze your financial situation to decide whether to approve you for a loan modification. Most lenders will want to verify that you can afford the modified payment, and will ask to see pay stubs or proof of your recent income, as well as copies of your tax return for the last two years.
For independent contractors who receive income through 1099s or small business owners, this can prove to be challenging. The experienced and professional attorneys at Babi Legal Group can help guide you through this process, no matter how complicated your financial picture may be.
Loan Modification Rules
The rules and regulations that will apply to your loan modification will depend on the specific program that you are hoping to get. For example, the FHA requires that borrowers must have adequate debt-to-income ratios as well as no other options loss mitigation programs at their disposal to qualify for the FHA-HAMP program. Borrowers must also go through a trial payment plan successfully before they are allowed to become full participants in the program.
For private loan modification programs, lenders will generally require borrowers to prove that they can’t afford their current mortgage payments and that they can afford to pay whatever the modified payments will be. The property usually has to be your primary residence.
Impact of the CARES Act on Mortgage Forbearance and Loan Modifications
The CARES Act was passed in March 2020 not long after the COVID-19 pandemic exploded in the United States. It’s a $2.2 trillion economic stimulus package that provided economic relief to people all around the country who were struggling financially.
There were many provisions in the CARES Act, including direct economic stimulus payments to individuals, grants and tax incentives for businesses and more.
One of the most popular programs available under the CARES Act was mortgage forbearance. This was available to millions of people who had loans that were backed by different federal agencies.
Loans Covered Under the CARES Act
Loans eligible for mortgage forbearance under the CARES Act were those backed by different federal government agencies and GSEs, or government-sponsored enterprises.
These include some of the most popular loan programs in the country, such as those:
- Insured by the Federal Housing Administration (FHA)
- Administered by the Department of Housing and Urban Development (HUD)
- Insured or guaranteed by the Department of Veterans Affairs (VA)
- Insured, guaranteed or made by the Department of Agriculture (USDA)
- Securitized or purchased by the Federal National Mortgage Association (Fannie Mac) or Federal Home Loan Mortgage Corp. (Freddie Mac)
- Guaranteed under certain sections of the House and Community Development Act of 1992 that target Hawaiian and American Indian families
These loans could have been eligible if they were held by individuals or even some commercial owners and landlords, though the rules for forbearance were different for each type of borrower.
Mortgage Forbearance
Mortgage forbearance is a process that provides financial relief to those who qualified under the CARES Act. It’s a way that you could pause monthly repayments on your mortgage so that you could have that extra cashflow to pay for other essentials. This was available to those who experienced financial hardship related to the COVID-19 pandemic.
Covered Forbearance Period
The initial forbearance period was 18 months if Freddie Mac or Fannie Mae backed your mortgage. To be eligible for those 18 months, though, you had to be in an active forbearance plan by September 30, 2021. The maximum extension period of forbearance after that is 12 months.
Other federal mortgages were also available for a forbearance period of 18 months, but again, only if you were in an active plan as of September 30, 2021. Otherwise, the forbearance period is 12 months.
During the forbearance period, the loan servicer is banned from charging interest, fees or penalties. They also can’t report you to a credit bureau for a missed or late payment, as long as you’re officially in one of the CARES Act forbearance programs.
Options for Repaying After Your Mortgage Forbearance Ends
When your mortgage forbearance ends, you were required to resume your monthly repayments as they were before the forbearance began. If you can continue to make those payments, then simply do so to get started again.
However, if you are having trouble working that back into your budget — or if you are still experiencing financial hardship — there are options that you have at your disposal.
Repayment Options Vary By Agency
An important thing to note is that your repayment options following mortgage forbearance depends on the agency that backs your loan. This is why you’ll need to reach out to your loan servicer immediately if you are having trouble repaying your loan once the forbearance period ends.
Some options might include reducing the amount of your repayments or modifying your loan in some other way to provide you with financial relief.
Steps to Request Forbearance under the CARES Act
To request forbearance under the CARES Act, you must directly contact your loan servicer, which is the company you make your payments to. The servicer will require you to submit certain documentation to prove the reason you need the forbearance, though it’s not extensive.
In most cases, a simple phone call will suffice to get the process started. You may have to follow up and submit documents via email or mail, though.
Loan Modification and the CARES Act
While the CARES Act itself didn’t provide any official loan modification programs, it did require the lender to offer loss mitigation options to determine the borrower’s feasibility to modify the loan and other related options once your forbearance period ends. Those are described in more detail below.
Refinancing FHA Loans After Forbearance with Your Mortgage Servicer
One common way that you could gain some financial relief after forbearance is by refinancing your FHA loan. Depending on your situation — including your credit score, how much equity you have in your home and what interest rate you qualify for — refinancing could result in a lower monthly mortgage payment.
A refinance will result in you basically replacing your current mortgage with a new one that has better financial terms. You’ll need to reach out directly to your mortgage servicer to initiate and apply for a refinance.
Refinancing VA Loans After Forbearance
If you have a VA loan, you will have two options to refinance. The first is called a VA streamline, or a VA IRRRL, or a cash-out refinance.
The VA IRRRL could be an option if you already have a VA mortgage, want to save money on your monthly payment but don’t want to take any cash from the equity you might have in your home. If you wish to take equity out of your home through a refinance, you’ll have to turn to the cash-out refinance option.
Consult with an Experienced Real Estate Attorney
While the loan modification and mortgage forbearance programs under the CARES Act have now ended, there are still options to avoid foreclosure if you’re having trouble repaying your mortgage.
This can be a complicated process, though, which is why it’s best to consult with an experienced attorney. At Babi Legal Group, we have more than 20 years experience in real estate law, and more than 10 years of experience in debt collection, debt settlement and bankruptcy.
To learn more, please contact us today.
