Refinance vs. Modification: What are the differences?

By Yvonne Castillo, Housing Counselor at SurePath Financial Solutions, one of the members of ForeclosureHelpSCC

With the housing crisis all around us in San Jose, Sunnyvale, and other cities in Santa Clara County, we hear some buzz words over and over, words such as foreclosure, modification, refinance and short sale. As a HUD-approved housing counseling agency, we often hear questions about the differences between modification and refinance, and which one is the best one to choose. The information below explains some of the main differences between these two options.

REFINANCE
What is a refinance?  A refinance is a new loan that you take out to pay off your old loan. A traditional refinance will require you to have equity on the property (up to 20%) to request a new loan.

Reasons why people refinance:  There are many reasons you may want to refinance your existing mortgage. For example, you may do it to lower your payments or interest rate. Or, to consolidate your 1st and 2nd mortgages, to extend or shorten the length of your mortgage, to change lenders, or to add or remove someone from your existing mortgage.

What happens when you refinance?  It is similar to the process of when you received your original mortgage. Because this is a new loan, you will receive a new loan number and your new loan may have different terms than your old loan.

Before you contact a lender to consider refinancing you should order your credit reports from Experian, Equifax and TransUnion (consider using Annual Credit Report to get an idea of the information included in your credit report). Generally speaking, the higher the credit rating you have, the better an interest rate you can qualify for, and the more money you will save. You will also need to show sufficient income to afford the new payments as well as your household expenses.

Unemployment and temporary disability benefits are considered temporary forms of income. Therefore, they are not acceptable forms of income when refinancing. You should also be current on your mortgage, car and credit card payments for approximately the past twelve months when considering refinancing as an option to remain in your home.

What costs are involved in a refinance? When refinancing there can be origination, processing and closing costs. Some lenders may waive some of these fees by including them into the loan balance. Check with your lender about any up-front or financed cost involved.

What if I do not have equity in my property? If your property is worth less than what you owe and your loan is owned by Fannie Mae or Freddie Mac, you may want to learn more about the Home Affordable Refinance Program, also known as HARP. This is one of the federal programs to assist homeowners to refinance their loans even if they don’t meet the equity criteria. You can learn more about the program on the Making Home Affordable website.

MODIFICATION
What is a loan modification? It is a temporary or permanent change of the terms of the current mortgage agreement that is usually requested to make the mortgage payments more affordable.

What is the main reason why people request a loan modification? The main reason to consider a loan modification is to have more affordable mortgage payments and remain in your home, especially if you do not qualify to refinance your mortgage. You have to be experiencing a financial hardship which has made it difficult to make your current mortgage payments or missed one or more of your mortgage payments. It’s important to note that banks and servicers do not consider it a financial hardship if your only reason to modify your loan is because you owe more on your mortgage balance than the home is currently worth (also known as being “upside down”).

What terms can be changed in a modification? When receiving a loan modification you will keep your current loan number but some of the terms on your mortgage will be modified. This could include lowering your interest rate, or modifying an adjustable rate mortgage (where the interest rate varies) to a fixed rate mortgage where your mortgage payments and rate will remain fixed for the life of the loan. In some modifications, the interest rate is lowered for a few years (for example, a modification under HAMP can go as low as two percent), and then gradually increases over the course of a few years.

Will my payments be lower with a loan modification? For many households the loan modification has allowed them to reduce their mortgage payments and bring their loan current. However, it is important to note that if your current loan is an interest only loan, then changing it to a fully amortizing loan (where you are paying interest and principal) could result in an increase of your mortgage payment. However, banks and servicers can address this issue by lowering the interest rate, or lengthening the life of the loan (for example from 30 to 40 years).

In some limited cases, a loan modification may reduce or defer the balance owed. The homeowner may have a wish list of how they want their bank or servicer to modify their loan, but ultimately it is up to the bank or servicer (and sometimes the investor(s) who own the mortgage) whether or not they will modify the loan, and if so, how the terms will be adjusted.

Are there costs involved with a loan modification? Generally, there is no origination, processing and closing costs included when doing a loan modification. However some lenders will charge a small loan modification fee that is added to the balance of your loan and disclosed in the loan modification documents.

What information will be reviewed in a loan modification? Your bank or servicer will require a complete financial disclosure to evaluate the possibility of granting a loan modification. Information regarding your household income and expenses, amount of debt, proof of income, reason of the financial hardship, debt to income ratio etc, will be required to evaluate your modification request. If you have stopped making your mortgage payments, your bank or servicer will review if the non-payment is a result of the financial hardship. The bank will also want to see that there is a sustainable action plan going forward that will allow you to have sufficient income to continue paying your modified mortgage.

If you are a homeowner living in San Jose or Sunnyvale and want to know if either of these options will be applicable to your case please contact ForeclosureHelpSCC, a program funded by the City of San Jose and the City of Sunnyvale at (408)-293-6000 or visit our website www.foreclosurehelpscc.org. HUD approved counselors are available to provide free counseling sessions that will help you review your finances and evaluate the options for you.

Please note: All content included in the ForeclosureHelpSCC blog is provided for information only and should NOT be considered legal or tax advice. If you have any questions, please feel free to contact us on our hotline: (408)-293-6000, or visit our website: www.foreclosurehelpscc.org

Reopening of ForeclosureHelpSCC Program

By Sean Coffey, Program Manager
I am excited to announce that the ForeclosureHelpSCC program re-opened on July 17, and the program has begun assisting homeowners and tenants in San Jose and Sunnyvale who are impacted by the mortgage meltdown.  Through this program, HUD-approved housing counselors will meet with homeowners to help them understand what their options are if they are struggling to pay their mortgage.  For tenants who are in homes that have been foreclosed on, we can help them to understand their rights and options if there is a new landlord, if they want to move, or if they are being asked to vacate or are facing eviction. We can also provide tenants additional referrals for tenant-focused programs.

Consortium Partners
One of the biggest strengths of the ForeclosureHelpSCC program is that it is a consortium effort.  Our four housing counseling agencies include Asian Inc, Neighborhood Housing Services of Silicon Valley, Project Sentinel, and SurePath Financial Solutions.  The support specialists who assist with the day-to-day operations of the program are trained volunteers from the Santa Clara County Association of Realtors, some of whom have been volunteering since the inception of the program in May 2009.  Legal referrals are handled through the Fair Housing Law Project at the Law Foundation of Silicon Valley.  Of course, none of these services would be possible without the financial support from the cities of San Jose and Sunnyvale.  This diverse base of partners is not only essential for running the program, but it also means that we are also able to reach a larger number of people that could benefit from the services of the ForeclosureHelpSCC program.

What does the Future Hold?
The program has been open for three weeks, and we are already receiving phone calls and meeting with homeowners who want to learn about their options.  Beyond word-of-mouth referrals, we also will be marketing the program widely, and this will include letting homeowners know about new programs and resources through this blog. In the coming months, we will be writing about a variety of topics related to the program, including tips for working with your bank or servicer, budgeting strategies, new programs like Keep Your Home California, and new legislation like the California homeowner’s Bill of Rights.

Independent Foreclosure Review
For our first post, we’d like to highlight the Independent Foreclosure Review, which is especially timely because the deadline to apply for a review was just extended to December 2012.  The Independent Foreclosure Review was included in a settlement between federal regulators and 14 banks for the way they processed modifications and foreclosures in 2009 and 2010.

If a homeowner was in any sort of “foreclosure action” between January 1, 2009 and December 31, 2010, and they feel it was improperly processed, then they may want to learn more and consider applying.  A foreclosure action does not necessarily mean the house was sold, the homeowner could still be in the home.

A foreclosure action includes:

  • the home being sold through a foreclosure judgement,
  • the loan went into the foreclosure process but the homeowner brought the mortgage current or entered a payment or modification plan,
  • the home was in foreclosure and the home was sold, the borrower participated in short-sale, or gave the home back to the bank via a deed-in-lieu, or
  • the mortgage was in foreclosure, the mortgage is still behind, but a sale has not yet taken place.

It also has to be the primary residence, and it only applies to the 14 banks/servicers included in the agreement. There is more information about eligibility on the Independent Foreclosure Review website.

If you know of any homeowners who are potentially eligible, please encourage them to contact us with questions.   If a review finds their modification or foreclosure was improperly processed, depending on the situation, the homeowner could receive financial payments, ranging from $1,000 to up to $125,000 plus equity that was lost in the foreclosure.  For more information on the financial penalties, view this chart: Financial Penalties. Thus far, the number of eligible people who have applied for a modification is far below the projections (See this June GAO report for more information), so it is important to get the word out before the deadline passes in December.

Please note: All content included in the ForeclosureHelpSCC blog is provided for information only and should NOT be considered legal or tax advice.  If you have any questions, please feel free to contact us on our hotline: (408)-293-6000, or visit our website: www.foreclosurehelpscc.org

We encourage your feedback, comments, and suggestions for future blog topics. However, the comment area is NOT for soliciting business, and any comments that appear to solicit business will not be posted.