Updated July 29th, 2019
If you’ve had a loan modification on your mortgage, you’re not alone. Loan modifications have helped many people avoid foreclosure, especially after the mortgage crisis of 2008 when foreclosures hit record-breaking numbers.
While loan modifications may have helped people stay in their homes, how do loan modifications affect people when want to sell their homes?
It’s possible to sell your house after having a loan modification, but there are some things you’ll want to look out for when you’re trying to sell.
If you’re thinking about selling after a loan modification, it’s important you have an expert realtor familiar with lending procedures and loan modifications to get the most for your home and have a smooth closing with no unwelcome surprises.
What is a loan modification?
A loan modification is a permanent change to the original terms of your mortgage to lower payments and give you a chance to catch up if you’re experiencing financial hardship. Lenders will do this to avoid a foreclosure.
Most lenders are more willing to change the loan terms than risk having to foreclose on your house, because foreclosures are more expensive for the lender.
A loan modification is not the same as refinancing. Refinancing replaces your loan with a new loan. A loan modification changes the terms of your existing loan.
A lender might lower the principal amount, lower the interest rate, change the interest rate from a variable interest rate to a fixed-interest loan, or extend the length of the loan to lower the monthly payments.
How does a loan modification work?
Lenders may offer loan modifications to borrowers behind on their payments or close to defaulting on their loan if the borrower can prove they are experiencing financial hardship.
In most cases, to get a loan modification you must prove financial hardship such as job loss, illness, or death of a spouse. You might also be able to get a loan modification if the interest of a variable interest loan has made it impossible for you to make the payments.
To apply for a loan modification, you’ll be asked to submit documentation to prove your situation. It’s up to the lender which type of modification they agree to make on your mortgage if they determine you’re eligible for the loan modification.
Permanent loan modifications last for the life of the loan. In a loan extension, the loan may be changed from a 30-year loan to a 40-year loan. This will lower the payments but you’ll pay more in interest in the long run.
In an interest rate deduction loan modification, several things can happen. The lender might change from a variable interest rate to a fixed interest rate. Or the lender might lower the interest rate. This doesn’t always mean that you’re getting better terms. The lender can elect to apply the reduced interest amount to the principal of the loan on the back end you must pay later.
In a principal deferral loan modification, the lender reduces the amount of the principal that is paid off with each loan payment. But when the loan matures or the property is sold, that amount of principal that the lender deferred is due.
It’s important to understand what type of loan modification the lender offers you. A principal deferral, for example, could result in an additional payment or second lien when you want to sell your house that you may be unaware of. Make sure you have an expert seller agent who understands loan modifications if you’re trying to sell our house.
Common Reasons for Selling After a Loan Modification
Regardless of the reasons for selling after a loan modification, a loan modification doesn’t mean you have to stay in your house forever if you don’t want to.
Some people find they are still struggling after a loan modification and want to get out from underneath their mortgage before they get behind again to avoid a foreclosure or a short sale.
Others might want to take advantage of the equity they have and get a smaller house.
Then again, reasons for selling after a loan modification could have nothing to do with finances. Just because folks have had rough patches in the past doesn’t mean they’re still experiencing financial hardship.
Some people sell their homes because their children have grown up and they no longer need so much house. Or their job may require that they relocate. There could have been a divorce. Or they just might want to move and try something new.
Can I sell my home after a loan modification?
Yes, you can sell your house as soon as the permanent loan modification is in effect. Your lender can’t prevent you from selling your house after a permanent loan modification.
However, there may be a prepayment penalty attached to the loan modification. A prepayment penalty is a provision in your contract with the lender that states that if you pay off the loan early, you’ll pay a penalty.
A prepayment penalty can be expressed as a percentage of the principal balance or a specified number of months interest. This can result in an additional fee of thousands. For example, if you have a 3% prepayment penalty and a principal balance of $200,000, the prepayment penalty would be $6,000.
Prepayment penalties usually decrease or disappear after a few years, but you’ll need to check your loan documents to make certain. Prepayment penalties were limited for some mortgages by a new law effective January 2014 in accordance with the Dodd-Frank act of 2010, but the law is not retroactive and doesn’t apply to all mortgages.
How to Sell a Home After a Loan Modification
The first thing you need to do if you want to sell your home after a loan modification is to request the payoff amount from your lender in writing. The payoff amount should reflect the total amount to pay off your loan. But it’s possible that it’s incorrect if you’ve had a loan modification.
This is why once you have your payoff amount, it’s critical you work with an experienced realtor familiar with loan modifications.
There have been many reported cases of the payoff price initially given being incomplete and the lender later demanding additional amounts during closing.
This is especially true of any loan modifications done after the subprime mortgage crisis. Some loan modifications imposed a second lien on the property that the borrower was completely unaware of.
If you’ve had a loan modification done and want to sell your house, you need an expert seller’s agent who understands how to deal with your lender to make sure the payoff price is all that you owe.
If you’ve had a loan modification and want to sell your house, make sure you find an excellent seller’s agent with lender experience. Clever Partner Agents are the top of their local markets and carefully selected based upon their experience and reputation. In addition, they will save you thousands in commission. Find a top agent in your area today and successfully sell your house for less.
Top FAQs About Selling a Home After a Loan Modification
Can a loan modification hurt your credit?
A loan modification can hurt your credit score, but how much it affects your credit depends upon how your lender modified your loan, and what the lender reported to the credit agencies. If the lender lowered the principal balance by initiating a second loan, that amount may appear on your credit as “charged off” which can damage your credit. However, most loan modifications only appear on your credit report in the form of the late payments that you missed before getting the loan modification. Either way, both options are preferable to a foreclosure which stays on your credit for seven years.
Are loan modifications permanent?
Loan modifications usually become permanent once you successfully complete a trial period of paying as agreed. Most loan modifications have a trial period of three months during which you must prove the ability to meet the new payment requirement. As long as you make the payments and you meet the eligibility requirements, the loan modification will become permanent.
Can you negotiate a loan modification offer?
You can try to negotiate a loan modification offer but make sure you’ve done your homework. You’ll want a documented long-term plan that describes how you’ll be able to meet the terms you’re proposing. If you want to negotiate because you find the banks offer unfair, such as trying to add another 30 years onto your loan, create another loan for a principal reduction, or add an outrageous prepayment penalty, engage the services of an attorney or a non-profit counselor who specializes in loan modifications.
How long after a loan modification can I buy another house?
In most cases, you can get a mortgage to buy another house after a loan modification as long as you haven’t missed any payments over the previous 12 months, depending on the specifications of your lender. But you need to know how your original loan was modified. If you had any principal balance forgiveness or “write-down” on your mortgage, you may not qualify for a conventional mortgage loan. But there are other ways to get a mortgage with a low credit score.
Can I rent out my home after a loan modification?
If you want to rent your home after a loan modification, you need to check the fine print of the contract you have with your lender. Some lenders could add a clause that requires you to live in the home. When the lender modified the loan, they may have stipulated “owner-occupancy requirements.” These requirements require the person who signs for the loan to live on the property for a set amount of time after the loan modification.