Is Loan Modification Underwriting Important? First, let's get the one thing out of the way: a Loan Modification is not Refinancing. Refinancing means that you're getting a whole new Mortgage Loan with all the paperwork and procedures involved. In other words, a brand-new mortgage. But a Mortgage Loan Modification is solely intended to allow buyers to stay in their homes in the face of unanticipated financial difficulty – such as that which we have experienced in the past two years of the pandemic! This may involve lowering your rate or extending the term of the loan. Now it's not an entirely new loan, but some very similar processes to the original loan procedure are involved. The Loan Modification Underwriting Process is quicker, easier, and can be carried out with much less paperwork and pain. Since the Mortgage Loan Modification Underwriting is carried out for the same institution that originated the loan in the first place, they can easily verify your new financial situation. And since foreclosure is a lengthy and expensive process, they're motivated not to foreclose on your original mortgage. They're much more likely to be lenient with their requirements. And the borrower avoids the stain of foreclosure on their credit record.
How Lenders Are Motivated?
Foreclosure is an expensive and complicated process that simply takes too much time from lenders who lately are experiencing limited workforce and resources! It's much easier, quicker, and everybody can "win" if they modify the loan! Loan modification also benefits the borrower: no one wants to go through foreclosure, so both lenders and borrowers are motivated to find a way to keep the mortgage going. Here are a few ways lenders can modify a loan:
- Lower The Interest Rate – Although sometimes temporary, lenders can reduce interest rates to decrease monthly payments. This can be permanent or temporary.
- Extended-Term – This path extends the life of the loan, reducing monthly payments. While it may produce a higher interest rate, extending the term reduces the monthly payment.
- Postponed Payments– Also known as forbearance agreements, this option allows borrowers to put a pause on loan payments temporarily. This offers only temporary relief since the payments missed will be tacked on to the mortgage total.
- Principal Reduction – The lender will forgive a portion of the total debt and then adjust the monthly payments to reflect the new balance.
- Government Help – Some borrowers may be able to take advantage of a government mortgage modification program like the Cares Act, High Loan-to-Value Refinance Options, or Fannie Mae's Flex Modification or High Loan-to-Value Refinance Option.
But it's called Modification because it's the original loan with some changes that will allow the borrower to continue with the loan. As mentioned earlier, this may involve extending the length of the loan or reducing the interest rate. The goal is to lower the existing monthly payment to an affordable number.
Loan Modification Process. Step By Step.
The loan modification process is less complicated, less time-consuming, and shorter than the origination procedures.
- It starts with underwriters who will go through collecting all the documents needed for the Modification.
- The borrower's current financial situation will be reviewed and analyzed.
- Then the findings are assessed, including current financial situation, assets, debts, income, and current property value,
- After reviewing all the facts, including verifying the property's current value, a determination is made as to what kind of Modification would be best.
One of the tools that the underwriter will rely on is called Net Present Value or NPV. As its name implies, NPV shows how much the current mortgage is worth today. If the modified mortgage has a more significant investment value than the unmodified mortgage at its present state, likely the NPV will be positive. If the NPV is negative, meaning the modified loan would be worth less than the original, unmodified loan, it's unlikely that the lender would be willing to modify it since they'll be losing money and maybe setting the borrower up for another crisis in the future.
So it comes down to whether the modification is a good investment. In other words, it is the property above or underwater in today's market. If it's below the market value, that's good, and the loan likely stands a better chance of being modified. If the mortgage is worth less than the market's value, the outlook is dimmer.
The typical loan modification process usually follows this path: Contact the lender, complete loss mitigation papers, submit a hardship statement, submit all financial information. If denied the modification, that decision can be appealed.
Loan Modification is a goal. How the borrower gets there becomes a minor issue. Borrowers must remain flexible throughout this process since the lender holds all the cards.
Options For Lenders
While the lender might want to "save" the original loan any way possible, and they have ways to speed the process along (outsourcing the loan process, going all digital with processing documents), ultimately, the borrower bears the responsibility for making Loan Modification work.
