Refinancing After A loan Modification
by Joe
(Teaneck, NJ)
If I do a loan modification, can I refinance later on or will it be a problem.
Mortgage Loan Modification Answer:
To Refinance or Modify Loan
by Loan Modification Expert - Dan North
Good question Joe.
The answer really depends on a few factors but as a general rule of thumb, without having any specifics of a situation:
If you can refinance, do the refinance right away
Banks are in the business of making loans. Loan modifications are a fall back position that lenders prefer not to do but will do though not nearly as quickly as they will finance a mortgage.
Look at the statistics available in Dec 09, almost 730,000 trial loan modifications started since the Making Home Affordable Program started. In that same reporting period roughly 31,000 loan modifications have been made permanent while during the same time period 3,000,000 loans have been refinanced under the Home Affordable Refinance Plan.
Getting a refinance if you qualify is a faster process and you have a lot more control on locking in terms right now. The down side are the costs that you may incur to refinance although you may be able to have the refinance fund the costs.
The Pro's and Con's
of Loan Modification
- The most obvious benefit is that you are not taking out a new loan and do not need to re-qualify or pay any of the costs associated with a new loan.
- Generally this means that your credit score if it has taken a hit will not be a deal breaker.
- If you have been delinquent for months and your lender is not making a move to foreclose (I have clients that have gone a year delinquent with no foreclosure sale date set) your lender is
likely to do a modification fast to get you paying again
- The downside on a loan modification is that it can take months (especially if you are current expect to take 6 months or more)
- Currently lenders are making credit reports on loan modifications that will affect your credit score. Something along the lines of borrower on a reduced payment plan. This can be negotiated as can any other point to something along the lines of "current making modified payments". This should not have a negative effect on credit score.
Currently lenders are granting trial modifications and only making about 4% into permanent modifications. This may have more to do with accounting practices than willingness to modify loans.
The current practice is to continue to make new trial modifications repeatedly on the same loan in effect lowering your payments to 31% of gross income but not making it permanent.
Why Aren't Lenders Making Loan Modifications Permanent
Once a Trial Loan Modification is made permanent that loan which was listed as an asset of the lender now has to be reduced in value on the lender's books. This lowers the lenders reserves and which also lowers the amount a lender has available to make new loans with.
One loan will not make that much difference but what about 729,000 loans all written down to what they are really worth if they are made permanent loan modifications?
Is the real bank crisis being covered up by an accounting practice?
Banks can not afford to make all those trail loan modifications permanent. It does not make financial sense to do that if they can accomplish the same thing by just making trial loan mods repeatedly on the same loan and not have to take the bigger financial hit of writing down the loan to its true value.
Back to the Original Questions:
If I do a loan modification, can I refinance later on or will it be a problem?
The answer is a definite yes and no. Yes you can refinance later, but if you can refinance right now is there an advantage in doing a loan modification first? Do you have a choice? You may have to wait to refinance if you take a credit hit from doing a loan modification.
Maybe The Real Question Should Be: What Will Benefit Me The Most? Refinance or Loan Modification?
I have included a 19 in 1 calculator so that you can figure out what your best options are and what it will cost or save you on your different options.
Return to the top of Refinancing After A loan ModificationPre-Qualify for FasTrac Hardship Loan ModificationFree pre-qualifying for FasTrac Hardship Loan Modification. No charge to find out if you qualify and what modification you qualify for.
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