Have you heard that a loan modification could be the answer to your dreams? In some cases, it decreases mortgage payments and protects your credit score. However, on the other side, there are significant risks you take regarding your credit, especially if not approved for the modification. Here are the six downsides to a loan modification.
The Program Will Not Help You If Unemployed
The first downside of a loan modification is to realize, you may not qualify off the bat. The purpose of a loan modification is to help reduce your mortgage payments based on your pre-tax income. However, while unemployment is income to you, it is not considered the qualifying income under the Home Affordable Modification Program.
Submitting Lower Payments Hurts Your Credit
You should realize that once you apply for the loan modification program, the lender may ask you to make a lower monthly payment for their “trial period”. This reason could be to ensure you can handle the payment. However, partial payments are reported as such and that can have a negative impact on your credit score. If approved, be sure your lender corrects your report. If denied the loan modification, the negative marks will remain on your report.
Your Trial Period Could Put You Behind In Payments
During your trial period, making the lower payments places your principal payments behind. So if denied the modification, on top of your credit score suffering, you now have additional late fees to cover. This is doing the exact opposite of what you were hoping for – to protect your credit and have a more manageable mortgage payment.
If Your Account Is Sold, You May Have To Start Over
Over the past few years, mortgage accounts have transferred from servicer to other servicers, often without the homeowner even noticing. If this happens during the middle of your loan modification application process, it’s possible your application could be delayed or worse; you have to start over.
Payment May End Up Higher Than Expected
You sign your mortgage loan application; a fixed rate payment will stay just that. No other circumstance usually can change that except your home’s taxes or mortgage insurance. However, a loan modification is not an immediate process. It may take over three months for approval. And, at that time, your lender may want to re-verify your income. As stated above, your modified payments will be based on your working income. So what should happen if:
- You get a new job?
- You start working an additional part time job?
- Your spouse gets a raise?
- Your overtime hours increase?
That means your new loan modification payments could be higher, and in some cases it could be higher than your current mortgage payment is. So it’s important to consider these factors when your application is pending.
New Lines of Credit
If you get a loan modification you may not qualify for other lines of credit. Those that finally get approved for their loan modification find it hard to qualify for other types of loans in the near future. Having bad credit and getting a personal loan can be difficult especially if there is recent late payments.
It Is Not Guaranteed For Approval
Finally, remember, this is an application. So it can go one of two ways – approved or denied. If the application does not seem satisfactory to the lender, a denial could occur. They may not feel you can keep up with the payments if you are currently behind. On the other hand, the lender may decide that it’s just not worth it to keep the property at all. If so, they may discuss options of you selling the property via a short sale or start with the foreclosure proceedings.
Hi, my name is Jon and I run Compounding Pennies. I’ve been interested in personal finance since high school and love writing and talking about it. You can learn more about me in the Authors section of this site.