Refinancing After Restructuring Residential Loans

By: Lance T. Denha, Esq.

With the Making Home Affordable program set to expire the end of this year, combined with home values increasing, I have been finding that an overwhelming number of homeowners have received unfair loan modifications with interest rates continuously climbing as the years go by. There are also many instances where a borrower accepted a loan modification which pushed the missed payments and extended the term of the loan in order to make the payment affordable. They are now in dire need to get out of their current situation due to affordability.

If your current situation is similar to the one described above, you may be eligible to refinance with the current market rates. If you had a home loan modification in the past few years and you want to buy a new home or refinance out of your current situation, it’s a good idea to check your credit reports and credit scores to see how it may have affected your credit, and review for any errors or problems you need to resolve before you apply.

There are some requirements in order to be eligible under an FHA loan. FHA requires a one year mandatory waiting period to qualify for loan after having been granted a loan modification from your lender. However, many mortgage lenders have their own waiting period after loan modification requirements.

Lenders and underwriters reviewing a borrower for a potential refinance pay very close attention to the details of the loan modification granted to the borrower. For example, if the borrower’s application involves a loan modification in which principal balance deferment or forgiveness occurs (i.e. reduced the principal balance of the loan to market value), it will likely result in the denial of a new refinance application. Lenders prefer to refinance borrowers whose rate was reduced rather than those that received a reduction of the balance of their loan.

Recently, Fannie Mae changed its mortgage rules for borrowers with a recent bankruptcy, pre-foreclosure, or short sale. These types of loan workouts are classified as significant derogatory effect loans, meaning they adversely affect one’s credit score. It is vitally important to understand and review the credit report as there may be matters in which the classification on your credit report causes one to be ineligible for the type of assistance they seek. Many times the reporting on your credit report may reflect a foreclosure when in fact one had a short sale or a short payoff of the loan.

It is important to have the legal assistance necessary to dispute the derogatory nature of your credit report in order to be a viable candidate for the best rate possible, whether it is through refinancing or if you are seeking to purchase a new residence or investment property.