Homeowners facing payment difficulties should consider two options-loan modification versus refinance-when seeking a solution to an unaffordable home loan. What is the difference between the two and what are the pros and cons of each option? Here is a brief description of what each option has to offer a struggling homeowner:
Loan Modification vs. Refinance
Can be done at no cost vs. Borrower pays closing costs
No appraisal needed vs. Appraisal required
No escrow or title required vs. Escrow and title required
Almost always features lower interest rate vs. Rate subject to current market conditions
Completion time-30-180 days vs. 30-60 days
Credit score not important vs. Credit score criteria must be met
Lower home value can work in your favor vs. Declining home value may disqualify
Must verify income vs. Must verify income
When considering a loan modification versus refinance, homeowners need to first decide if their credit, home value and loan balance are better suited to the requirements of one or the other. Due to the current dramatic downturn in values of homes across the country, many borrowers will find themselves without enough equity to qualify for a standard loan refinance. Lower credit scores caused by missed payments may also be a problem. A loan modification does not require a high credit score as you are simply modifying the terms of your existing loan to make it more affordable. A lower home value can actually be helpful, as your lender will lose less money with a loan modification. Your lender has a motivation to help keep you in the home to avoid foreclosure and add to their already oversupply of bank owned properties.
Homeowners wondering about a loan modification versus refinance should also consider a new program called Making Home Affordable. This is a government subsidized home retention plan offered to homeowners who want to find a way to swap risky loans for more affordable ones. The program consists of two parts-each with slighlty different criteria.
Home Affordable Refinance Plan: Designed for homeowners who are not delinquent, but who are unable to take advantage of the current low fixed rates due to loss of home value. The current loan must be owned or serviced by Fannie Mae or Freddie Mac to qualify. The loan amount can be up to 125% of the homes current market value. Proof of income and appraisal may be waived or required-as determined by each lender.
Home Affordable Modification Plan: A standard program with a streamlined application process, this loan workout option does not require any equity, escrow or appraisal. The loan does not have to owned or serviced by Fannie Mae or Freddie Mac, but the lender must be participating in the program. Homeowners can be delinquent or not, but they must provide evidence of a financial hardship situation. They are also required to provide proof of their income, expenses and assets. All of this information is reviewed and a determination is made if the borrower is eligible. Since the approval guidelines and modification terms are standard for everyone, homeowners can increase their chance of success by taking the time to learn how to properly prepare their application before contacting their lender.
Struggling homeowners should take the time to research all of their options to determine which program they can qualify for and which option will be the most beneficial. A loan modification can be the answer to a lower monthly loan payment by lowering your interest rate, lengthening the term or other features designed to help you avert foreclosure. Take the time to research, learn and prepare before you make any decisions affecting your home and family.
