Barbara A. Rasmussen, Esq., a general practice attorney based in Quogue, has helped many clients avoid foreclosure through a loan modification. Ms. Rasmussen explains what restructuring is, when it’s the best option and what to expect when asking a lender for a hand.
How does mortgage restructuring differ from forbearance or refinancing?
Mortgage restructuring or loan modification is a process where you work with your lender to change the terms of your loan to get back on track with payments. This is often done by adding years onto the loan to reduce monthly payments; reducing interest rates, if offered by the lender; or tacking missed payments on to the end of the loan term as a balloon payment.
Forbearance is something recently put in place in response to the COVID-19 pandemic and through the CARES Act that protects homeowners from the fear of eviction and/or foreclosure. Forbearance requires federally backed loans, including loans owned by Fannie Mae or Freddie Mac, to offer homeowners a reduction or suspension of mortgage payments for up to one year in six-month increments. Under this policy, late fees are also not charged and late payments are not reported to credit agencies. New York also passed legislation that allows homeowners to request a 90-day reprieve on their payments.
It is important for borrowers to know that these payments are not being forgiven but are in a state of forbearance, meaning that any missed payments may be postponed or that the monthly payment may be reduced. Discretion is left to the lenders to decide who qualifies and what their specific options and terms may be. Also essential for homeowners to understand is that this is not automatic, and they should contact their lenders immediately to request forbearance.
Refinancing is always an option for homeowners to take steps to reduce monthly payments by pursuing other lenders and lower interest rates. This is done by a new mortgage application and does often have closing costs associated with same. It is important for the homeowner to weigh the benefits of the refinance, including how long they intend to keep the home, against the costs of the refinance.
When is restructuring the best option?
Restructuring your loan or applying for a loan modification is the best option when your ultimate goal is to keep your home. If the home is worth more than you owe on your mortgage, it is best to try to save the home. Typically, home values do increase, making homeownership a solid financial decision. Also, mortgage payments are often less than rent payments, so there’s often no benefit to losing your home in foreclosure. You will need to qualify, meaning you will need to establish your ability to pay going forward. Someone who is temporarily out of work due to this health crisis is a good example of someone who can show — once reemployed — his or her ability to pay the monthly payments and should easily qualify for a mortgage restructure.
Are there prohibitive upfront costs to restructuring?
Most lenders I’ve worked with for clients do not charge any upfront costs to restructure. Homeowners will need to prove their ability to start making payments and their financial well-being (proof of employment, recent pay stubs, assistance from tenants or other family members, etc.) and will need to explain any financial hardship that led to being behind in monthly payments. Lenders will often require three to six months of temporarily modified payments for a homeowner to prove compliance with the new payment schedule and ability to pay before the loan is fully approved for restructure.
Will mortgage restructuring change the existing interest rate of the loan?
It can. The answer depends on individual lenders as they set their own terms, and much depends on the market, the type of loan modification applied for, the financial status of the borrower, etc. Given the recent economic impact, many lenders may be forced to consider interest-rate reductions. In the past, I have also seen lenders increase interest rates upon restructure. It truly depends on the lender and the fact-specific scenario before the underwriting review departments of the lender. Everything can affect the terms of the loan modification, including where the home is located; how much is due versus the value of the home (loan-to-value ratio); the debt-to-income ratio of the borrower, etc. There is also a principal reduction option that was often offered after the 2008 housing crisis where a homeowner could be entitled to a reduction of the loan amount if one could establish that the home was no longer worth the payoff amount of the mortgage.
Do lenders have to offer a restructuring plan when a borrower is in foreclosure?
It is not a requirement; however, virtually all lenders will offer loan modifications. Most lenders do not want title to the home as they are in the business of lending, not owning. This is very different if you borrowed from a private entity as these lenders tend to be more aggressive in the foreclosure tactics and may ultimately want to take title in foreclosure.
Must a borrower already be in foreclosure to ask for mortgage restructuring or a loan modification?
Pre-COVID-19, restructuring was only available to homeowners already behind in their mortgage payments. However, this new CARES Act legislation and coordinating New York State legislation may lead to loans being restructured during this permitted “forbearance period” and without the need for homeowners to be pushed into foreclosure and to the brink of almost losing their home to have the option to restructure the loan.
What requirements must a borrower meet to qualify for restructuring?
Every lender is different and has its own criteria for a homeowner to qualify for a mortgage restructure or loan modification. However, for the most part, lenders are looking at the big picture. This includes aspects such as: What caused the homeowner to get behind on payments? What was the financial hardship and has it been alleviated?
Lenders will also look at where the home is located and how much it may be worth to determine the property’s loan-to-value ratio. Lenders will look at whether it is worth it for the homeowner to try to save the home. Another factor is the borrower’s overall debt and/or expenses. Can this borrower afford to keep the home? What is the debt-to-income ratio of the borrower?
Most lenders use a scale from which they determine affordability. They will look for the monthly housing expenses (mortgage, taxes and insurance) to be no more than 30 to 35 percent of the borrower’s monthly income. Often other expenses, such as high car payments or large credit card debt, will disqualify a homeowner from a loan modification if they cannot show that they can afford their lifestyle.
I usually recommend that clients use the time prior to mortgage restructuring to pay off any other monthly debt (i.e. auto loans and credit card debt) so their focus can be on keeping mortgage payments current without the stress of other debt.
In sum, homeowners struggling to keep up with their mortgage payments during this health crisis and the government shut down of all nonessential work should not hesitate to reach out to their lenders. You need to ask for relief to get relief. Lenders should be able to explain all options available under the CARES Act and coordinating state legislation. Homeowners who are put on forbearance and find that they still cannot get current or handle the payments after the forbearance period expires should not wait for the lender to start a foreclosure action against them. With the assistance of an attorney well-versed in foreclosure and/or mortgage restructuring, most can avoid losing their homes. It is often a time-consuming and confusing process and help from a professional is usually needed.
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