Can You Refinance on a Loan Modification?
Loan modifications and mortgage refinancing are two different vehicles to arrive at the same result, a lower monthly payment for the borrower in question. A loan modification changes the terms of the original mortgage contract while mortgage refinancing transforms a remaining debt into an entirely new loan. Either way, the borrower ends up making lower monthly payments.
Approval for the Modification
Since a person’s financial situation can change without notice, a person who has requested and was approved for a loan modification may find that a mortgage refinance becomes necessary later on down the road. Borrowers who have been approved for a loan modification wonder if their lender will approve a mortgage refinance after they have already lowered the borrower’s payments by approving the modification.
Refinancing After a Loan Modification
In most cases, being able to refinance after a loan modification becomes a matter of time. Requesting a refinance a month after a modification was approved will most likely fail, especially if there isn’t enough equity in the home. If a home is worth less than the borrower originally paid, the lender may see refinancing as too much of a risk.
A borrowers best bet after being approved for a loan modification is to make payments on time for as long as possible, paying more than the monthly minimum payment whenever possible, which places equity into the home at a faster rate. The average amount of equity that is needed in a home for a lender to approve a refinance is about 20%…so the borrower should try to reach that number as quickly as possible after their modification. If equity is not a problem, approval becomes a matter of lender policy. Lenders want to see financial stability and an improvement in the borrower’s ability to make payments on time. If these little improvements have been made and maintained over time, the borrower will have better luck with being approved for the refinance after modification.
Does a Loan Modification Change the Original Contract?
Having modified a loan does not disqualify a borrower from being able to refinance. A modification changes the terms of an original contract, nothing more and nothing less. If a loan is modified, it is just like the terms under the modification had been in place since day one of the loan. If a person meets all lender requirements and would be able to refinance on their original loan, then the person will most likely be able to refinance on their modified loan. The biggest trouble a person will run into with refinancing on a modified loan is if they have ever been in default, which is usually the case if approved for a modification. Payments in default are often enough to increase the risk associated with approving a refinance for a borrower, which is why putting as much time between defaulted payments and a refinance request is so important.
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Borrowers always want to have options, so making every effort to improve their credit score after a modification by staying current on their monthly payments and putting as much equity into their home as possible will increase the likelihood of being approved for a refinance in the future. Even if borrowers think they will never need to refinance after a modification, doing what they can to improve their credit score will allow the borrower to keep the option open…just in case. It is always better to have a backup plan and not use it than to need a backup plan and not have one. Contact attorney Jarrod Nakano for more information.Post Tags: Can you refinance on a loan modification