How to refinance after recent loan modification
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By Scott Sheldon  June 21, 2013 12:00 am

Homeowners who went through difficult financial times in recent years actually can still refinance their homes, so long as their situations have changed for the better.  

Many banks offered loan modifications to homeowners who otherwise couldn’t refinance because of equity position or repayment ability. 

Two government programs have helped homeowners stay in their home and/or reduced their liability payments. 

Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) have offered relief to homeowners in promoting long-term payment sustainability.

What HAMP offers

A loan modification or restructuring of the original terms of the mortgage typically resulting in:

• Reduction in the interest rate;

• Principal balance forgiveness, a situation where a portion of the principal mortgage balance was erased;

• Principle balance deferment, a situation where a portion of the principal balance was tacked on to the principle; that’s right, principle and interest on top of principle, thus delaying a payment for months at a time;

• Extension of the terms of the loan i.e. going from a 360-month term to a 480-month term;

• Changing from an amortized loan to an interest only;

HAMP is a loan modification done directly through the homeowners’ loan servicer (mortgage company collecting the monthly payment). These transactions do not involve a title company nor are there typical closing costs like there are on a traditional refinance.

What HARP offers

A refinance program for homeowners whose loans are owned by Fannie Mae or Freddie Mac, which allows them to refinance a home loan no matter the occupancy with no loan-to-value restriction. 

Unlike a modification, this type of transaction can be done with a common mortgage company, and it’s recommended as such, the consumer should compare mortgage offers. 

Requirements:

• Upside down no problem at all;

• Loan must have been acquired by Fannie Mae or Freddie Mac no later than June 1, 2009;

• Loan must still be owned by Fannie Mae or Freddie Mac; simply Google “Fannie Mae Loan Look Up Tool” or “Freddie Mac Loan Look Up Tool;”

• Eligible property can be a single-family residence, a two-four-unit property, a condominium or a PUD;

• Primary residence, second home or investment property are all permitted;

HARP Loans typically result lower interest rate and subsequent lower payment, and in some cases, even a shorter-term (if so desired by the consumer provided they can handle the shorter-term higher mortgage payment).

What lenders seek

While lenders today realize homeowners in some cases have had hardships in previous years, it is not necessarily an indication of future repayment risk. 

Mortgage companies will typically want all of the circumstances surrounding the modification. 

It would behoove a homeowner seeking a new refinance mortgage with better terms to share what happened with the loan modification, what caused the need to have the original mortgage terms restructured, provide the modification agreement and the original note of the restructured mortgage and what’s financially transpired since the modification. Providing this type of information will help ensure a favorable credit decision.

Lenders also will be paying very close attention to the details of the loan modification. These modification terms involve a principal balance deferment or forgiveness. 

If any of these components occurred on the modified loan in question, it’s likely going to result in the denial of a new refinance under HARP. Put another way, the only modified type of loan eligible to be paid off with a HARP Loan, is a modified loan that only had a reduction in the interest rate.

Mortgage tip: One caveat to the rule -one common type of modified mortgage is one where the original principal balance was reduced, homeowner is paying interest on the reduced amount, and the difference has no interest due until the house is sold or refinanced. This type of loan modification is eligible to be refinanced under the HARP Refinance Program, as there was no principal forgiveness.

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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