As a homeowner in Massachusetts, you may have completed a loan modification to give you some breathing room. If you’re still struggling to afford your monthly mortgage payments after modifying your mortgage, you may be contemplating a sale. If that’s the case, you may be wondering how a loan modification affects your ability to sell your home.
The good news is that selling your house after completing a loan modification is possible. However, there are considerations to make before finalizing your decision. We’ll cover the basics first, then dive into how you can sell your home after modifying your mortgage in Massachusetts.
What is a loan modification?
When you apply for a mortgage loan modification, you request to change or “modify” the original terms of your loan agreement. You may consider the loan modification process if you are struggling to afford your mortgage payments and want to avoid a short sale or foreclosure. In a sense, a loan modification is a bridge to help you get back on track with your payments.
A modification may include adjustments to the following elements of your mortgage loan:
- Loan term: If you’re going through a financial rough patch and are having trouble keeping up with your mortgage payments, a modification could help extend your repayment term — allowing you more time to pay off your loan. It also reduces the amount you owe each month, so you get back on solid financial ground.
- Interest rate: If the interest rate on your mortgage is higher than what’s currently available on the market, a loan modification may be able to adjust your rate, therefore lowering your monthly payments. One of the biggest draws of loan modification is the potential to reduce your interest rate since rates on mortgage loans are typically fixed.
- Loan structure: A loan modification may also help you adjust the overall structure of your current mortgage loan. For example, if you have an adjustable-rate mortgage (ARM), you may be able to turn it into a fixed-rate loan, which is more stable. In some cases, a lender may even forgive a certain amount of your principal balance during a loan modification.
What are the benefits of loan modification?
The main benefit of a loan modification is avoiding foreclosure on your home. The lender does this by helping you permanently lower your monthly mortgage payment and save on interest by adjusting your interest rate. Many lenders prefer loan modifications to foreclosures since they require more work on their part and are costly.
To see if you’re eligible for a loan modification, your lender will review your loan balance, terms, and overall financial situation to determine whether you are a good candidate.
With loan modifications, your lender will try to adjust your terms to get your mortgage payments closer to 30-35% of your gross income. Lenders use this guideline because people with housing costs under that threshold are generally able to keep up with their monthly payments.
Does a loan modification hurt my credit score?
Going through a loan modification may negatively impact your credit score — although not necessarily. The modification process itself generally doesn’t affect your credit; it’s the missed payments beforehand that do.
The impact varies depending on the terms of your modification and what your lender reports to the credit bureaus. As long as you pay your new monthly mortgage bill on time and fulfill the terms of the modification, you shouldn’t see much of an impact on your score.
Loan modification vs refinance
Loan modifications and refinancing are similar in that they both change the terms of your original loan. Unlike a standard refinance, a loan modification doesn’t replace your current mortgage — you still have the same mortgage and lender, just different terms.
Another key difference is that you generally can only receive a loan modification through your current lender. You can shop around for the best rate with different banks when you refinance your mortgage.
Is it possible to sell your house after a loan modification in Massachusetts?
Yes! Nothing in Massachusetts state law prevents you from selling after a loan modification.
If you’ve had loan modification on your mortgage, it doesn’t mean you’re stuck in your house forever. Your lender cannot prevent you from selling; however, you must pay off the entire loan balance to close on the sale.
If you’ve decided to sell your house, you should first contact your lender to request your current payoff amount. You want to get this information in writing to avoid any miscommunication down the road. Unfortunately, it’s not uncommon for a lender to provide an incorrect payoff amount then demand a higher amount during closing — which throws a major wrench in the process.
Something to be aware of with selling after a loan modification is prepayment penalties. This is when your lender charges you a fee for paying your loan off early. Though these charges are rare, it’s something so you can financially prepare for closing costs.
Reasons for selling after a loan modification
There are many reasons someone may choose to sell their house after completing a loan modification. If you were already struggling financially, sometimes lower mortgage payments aren’t enough to help you get back on your feet. Instead, you may want to sell to take advantage of your equity to buy a smaller house more in line with your budget.
Conversely, you may be doing just fine financially but need to sell your house because you’re unhappy with the neighborhood or need to relocate for work. No matter your reasons, there’s no reason to remain in your home if you’re ready to move on.
The bottom line
Selling your home after a loan modification in Massachusetts is possible. However, it’s essential to carefully review the terms of your modification agreement and speak with your lender to go over your options.
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