Now is the time to educate yourself about loan modifications. We are here to help! Many people who missed mortgage payments during the pandemic are now seeking a loan modification to get current on their mortgage. It is good to be informed about loan modification options – the different types, the pros and cons to each type. In the next blog, we will discuss the loan modification process. Let’s jump into our discussion of the different types of loan modifications available to borrowers: traditional loan modification, loan modification with partial claim mortgage, and loan modification with forgivable partial claim mortgage. Click here to learn more about the loan modification process.
To have attorney help you navigate this process, schedule a consultation here: Schedule a consultation now!
Description: A traditional loan modification takes the entire amount due (the mortgage arrearage) and creates a new mortgage with a new 30- to 40-year term and a new interest rate. It is essentially a brand new loan.
Pros and cons: The benefit of a traditional loan modification is that the loan is brought current. The shortcomings are that it is essentially a new mortgage and you will have another 30-years+ of mortgage payments. In the beginning of a mortgage, almost all of the payments go towards interest so while a traditional loan modification WILL get you out of default and save your house, if you’ve been in your current mortgage for more than 10 years it can tack on YEARS to your mortgage. It is often better to file a Chapter 13 bankruptcy and catch up the payments that way than modify the mortgage.
Description: A loan modification with partial claim mortgage takes part of the amount due and creates a new 2nd mortgage with a new 30- or 40-year term and a new interest rate. This 2nd mortgage is comprised of the arrearages, and is the “partial claim” portion of the loan modification. Typically, this 2nd mortgage or “partial claim” mortgage does not accrue interest or require payments due. This 2ndmmortgage or “partial claim” mortgage must be paid, however, when the property is sold, when the modified mortgage is paid in full, or at the maturity date of the 1st mortgage. (also usually 30-40 years).
Pros and cons: The benefit of a loan modification paired with a partial claim mortgage is that some of what you owe won’t accrue interest. This is especially helpful if there is a large default and that is usually when this option is available. The shortcoming is that you do not get to choose this option, it is up to your mortgage company to offer it or not. It may also require a large lump sum payment when your 1st mortgage is paid off – you may be able to refinance at that time, but this could add years of house payments.
Description: A loan modification with a forgivable partial claim mortgage takes part of the amount due and creates a new mortgage with a new 30-or 40-year term and a new interest rate. Similar to a loan modification with a partial claim mortgage, it creates a 2nd mortgage that doesn’t accrue interest or require payment. This 2nd mortgage or “partial claim” mortgage is forgiven after a certain number of years of owning the property after the modified mortgage is created. If the property is sold prior to that time the loan is due in full.
Pros and cons: The benefit of a loan modification with a forgivable partial claim mortgage is that some of what you owe won’t accrue interest and you likely won’t have to pay it back ever. These loan modifications are rare and it is up to your mortgage company whether it is an option. Also, if you find yourself having to sell before the required amount of time passes, you will have to repay it. This is a great option if you don’t expect to need to move in the next 5 years which is the typical period you have to hold the property after the modification is approved.
To have attorney help you navigate this process, schedule a consultation here: Schedule a consultation now!
Heather D. McGivern is an attorney at FLPC. Before joining FLPC in 2020, she spent over a dozen years representing mortgage creditors.
