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A Guide to Getting a Mortgage After You’ve Had a Loan Modification

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If you had a mortgage just a few years ago, fell on hard economic times or were offered a mortgage loan modification by your loan servicer and you’re looking to apply for a new mortgage loan, you’ll need to meet certain credit requirements to get a green light on a new loan. Here’s what you need to know.

What Is a Loan Modification?

A loan modification, also known as a restructured mortgage, is a loan in which the original terms of the agreement have changed, resulting in the restructuring of the debt.

The most common forms of loan modifications had to do with rate and payment restructuring when borrowers were unable to refinance. Another common strategy for mortgage companies was to offer principal curtailment (reduce the amount owed) rather than forgive debt. The difference was repositioned as a lien on the home in the form of a silent second mortgage (a mortgage not disclosed to the original lender), which did not come into play until the home was refinanced or sold.

It is important to note here that a loan modification is different from a mortgage refinance. A loan restructuring changes the terms of the original mortgage, whereas a refinance pays off the original mortgage loan in exchange for another. Most homeowners these days are not seeking a loan modification, and most banks are not promoting them, as the economy has shifted tremendously from just a few years ago.

The Lowdown

If a modified mortgage is in your past and you’re looking to take out a new mortgage, then these rules apply:

  • To be eligible, you have to have made at least 24 mortgage payments since the restructuring was completed. It is this black-and-white. Even if there was a second mortgage in place that was restructured, this same waiting time applies — whether the mortgage is on a primary home, a secondary home or an investment property.
  • If you are purchasing or refinancing another property independent of the property that has a restructured loan, a one-year waiting time applies.

If your previous loan modification contained a forbearance, a period during which you did not make a mortgage payment and the additional interest was tacked onto the principal balance of the mortgage at the time the restructuring was completed or if there was a principal balance forgiveness, it’s going to be up to the individual mortgage company to approve. Generally, mortgage loan companies frown on this, even if you have met the 24-month — or 12-month requirement — depending on your individual circumstances.

Planning Ahead: Refinance or Modification?

If your mortgage loan servicer offers you a lower monthly mortgage payment, make sure it is a bona fide refinance offer, rather than a potential loan modification. If you are unsure as to whether or not the offer you’re receiving is a loan modification or refinance, be smart, get it in writing.

The best outcome to maintain your credit standing is refinancing rather than restructuring. If refinancing is not an option, perhaps due to home equity for example or a heavy debt load, and loan modifying is an option with your current loan servicer, know that you’re going to be limited on your future mortgage options for up to two years.

Additionally, lenders are required to report modified/restructured mortgages on the tri-merge credit report mortgage banks use to make credit decisions. This financial services credit report is how banks find derogatory credit events. Even if you didn’t have any missed mortgage payments, a restructured mortgage can still be a red flag to potential mortgage lenders.

If you had a home loan modification in the past few years and you want to buy a new home, it’s a good idea to check your credit reports and credit scores to see how it may have affected your credit, and to see if there are any errors or problems you need to resolve before you apply. You can get your free credit reports from AnnualCreditReports.com and you can get your credit scores for free from several sources, including Credit.com.

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  • pixeltea

    Hi Scott,

    I wonder if there might be some advice or direction you could offer. I own a duplex in Oakland and have been working to improve it for over ten years now. As values are increasing, it seems I have some good equity now. During the crash, I did incur debt I’d like to get rid off hopefully using some of this equity. Seems logical, right? Well, I did get a modification four years ago, and although my credit is very good today, I don’t seem to be able to find someone who will refinance after a modification that included a forgiveness.

    Am I now stuck with this same mortgage and this same bank (shudder) forever?

    Thanks for any advice,

    • http://www.Credit.com/ Gerri Detweiler

      I ran your question by Scott and he said, “In order to refinance a restructured/modified loan the borrower has to have made a minimum 24 timely payments or longer on the modified loan. If the the subject property is the modified loan, this 24 month or longer rule would apply. The borrower had a modification on another property 12 months of minimum timely payments or longer is required. While it is not a guarantee I can help this person, if they meet the waiting time requirement I could help them.”

      You may want to reach out to him directly if you need more information. Hope that helps!

  • Mac

    We have a Loan Modification that started in May 2015. We obtained permission from lender and sold property in October 2015. Lender returned our escrow account in November.
    We are now debt free, employed and have enough money for 20% down on a much lessor $ home. Do we still have to wait 2 years before we are released from modification program?

    • Jeanine Skowronski

      Hi, Mac,

      You may want to consult a consumer attorney to find out what your options may be.



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