Loan modification brings rates back to 3%, even for residential real estate

If it sounds too good to be true, it probably is. That’s probably your reaction when you read this headline.

Loan modifications are not a relic of a bygone era, however, but have surged in recent months due to an increase in the number of loans. Mortgage Interest rates are said to be as low as 2%, but this practice has become unsustainable. Here’s what you need to know to determine if your investment property qualifies.

What is a Mortgage Modification?

According to Commercial Mortgage Analysis, Inc. Creed IQloan modifications are expected to surge in 2024, surpassing the record set in 2023.

• lower interest rates.
• Extend loan term.
• Restrain or reduce your principal balance.
• various combinations of these.

Approximately $22 billion in loans modified In the trailing 12 months ended May 31, more than $9 billion in loans were modified from 2024 to May. Average monthly CRE loan modifications are $1.8 billion.

The loan modification data cited by Creed iQ involves large commercial Buildings such as high-rise office towers or large complexes, and smaller residential properties are also eligible for renovation.

Types of Loan Modification Programs

Flex modification plan yes one This is most common for homeowners and investors with conventional mortgages owned by Fannie Mae or Freddie Mac. For investors, the mortgage must be 90 days or more past due. Your lender must determine that your loan is at imminent risk of default, even if the loan is current or you have not exceeded 90 days of delinquency.

The Flex Modification Program is an offshoot of the HAMP program (Fannie Mae Home Affordable Modification Program), which you may remember from the 2008 financial crisis. according to Fannie Mae websiteFlex modifications utilize components from HAMP, Fannie Mae Standard, and Streamlined modifications.

Highlights include:

• This solution can be applied Applies to all mortgages (including commercial mortgages and investment property mortgages) according to servicing guidelines.
• The program requires borrowers who have been delinquent for less than 90 days to file a full loss reduction application, targeting a 20% reduction in payments and a 40% reduction in their housing cost-to-income ratio.
• The program aims to reduce payments by 20% for borrowers who are 90 days or more delinquent and does not require documentation from the borrower.

Enhancements to program make it easier to qualify

In May 2024, the Federal Housing Finance Agency (FHFA) announced Enhanced functionality Flex modification plan, including The principal and interest rate are reduced by 20%. it Mortgage term extensions (up to 480 months) and principal deferrals are also available.

However, simply applying may not be enough to qualify if you are late on your mortgage payments. Homeowners must clearly demonstrate difficulty paying the mortgage, which, in addition to personal reasons (such as divorce or loss of income), may also include housing costs beyond your control, which may include higher mortgage rates, taxes, insurance, etc.

Apply for Flex modification

Under the terms of the program, lenders and mortgage servicers must contact borrowers who are 30 days or more behind on their home loans. However, even if you are not yet After 30 days, you can contact your lender or servicer to initiate a request called a “Borrower Response Packet.” It includes the following documentation:

• Borrower Assistance Form.
• Request a personal tax return.
• Proof of financial hardship.
• Proof of income.

You do not need to fill out these forms if you are 90 days or more behind on your mortgage. You are eligible for simplified Flex Modification without providing proof of income.

Various loan modification plans available

according to Modification centeris a company that specializes in loan modifications, Flex Modification is just one of them type Renovation plans available to homeowners and investors. Their website lists 15 different types of modifications and cites main Chase, Wells Fargo and Bank of America are among the banks that have made modifications to their loans.

Representatives from Revise The center told BiggerPockets:

“Banks don’t want you to modify your mortgage and lower your interest rate because they won’t make as much money, so they’re unlikely to give you the lowest interest rate if you deal with them directly. It’s not an easy process. The servicing reps know Borrowers may initially receive a call from the servicing department before modifications are made.

“You have the borrower on one side and the bank on the other, and the only way to get the bank to notice is to delay payment for 90 days. That can be nerve-wracking for customers. I hear it in their voices.

Borrower’s credit may take a hit

In these cases, Revise The center deposits the payment into an escrow account, which is then applied to the mortgage once the modification is complete approved above. Of course, offering a mortgage to a third party is a cause for concern for those looking to modify their loan. However, the company insists their loan modifications are legal and comply with government programs.

To reassure potential customers, Modification center There is no upfront fee, but get paid After the modification is completed. Borrower’s credit may be affected (depending on the entity lending the mortgage) hold Below) After missing payment, Revise The center say will appear as exist The value is current when modifications are made and will be increased by periodic payments over time.

final thoughts

Clearly, As evidenced by the number of commercial sector mortgage loans, loan adjustments are an effective tool in fighting economic downturns. Interest rates rising rapidly We’ve seen that since the pandemic. For owners of these large properties, the decision to modify their loan may be relatively easy one. This can mean the difference between continuing to operate and not operating at all.

For smaller investors, the decision may be even more concerning. There is a big trust issue here. Will the bank agree to modify your loan? Are your escrow funds safe? If you use A third party to handle modifications? How severely will your credit be affected? Will you lose your investment if the bank forecloses?

Investors must ask these questions, check out testimonials and talk to previous clients before making a decision. The lure of a 2% or 3% interest rate makes a loan modification irresistible.

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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.