With the creation of COVID-19 vaccines, relief from the physical, emotional and financial toll the pandemic has taken on New Yorkers is in sight. But in reality, it won’t be immediate. Therefore, New York Governor Andrew Cuomo has taken additional steps to protect homeowners from foreclosure. He did so by approving legislation known as the COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020 on December 28, 2020.
This new law, which took effect immediately, protects homeowners by putting a statewide, 60-day halt to mortgage foreclosures. It also lets homeowners experiencing financial difficulties due to the pandemic file hardship declarations. By filing these declarations, struggling homeowners can receive protection from mortgage foreclosure until May 1, 2021.
A different law allows eligible homeowners affected by the pandemic to get yearlong mortgage forbearance.
Meanwhile, homeowners across New York State who are having difficulty paying their mortgages for reasons other than the COVID-19 pandemic are still fending for themselves. Although there are mechanisms for relief for them as well, there are also plenty of questions. For example, will a loan modification stop foreclosure? If not, what are the alternatives? Keep reading to find out.
What is a Loan Modification And How Does It Work
In essence a loan modification or mortgage modification is a temporary or permanent adjustment to one or more terms of an existing loan. It is designed to make payments more affordable. Examples include:
- Changing the duration of a loan
- Changing the type of mortgage (from adjustable to fixed-rate)
- A reduction of the interest rate
You may qualify for a loan modification if financial difficulties have caused you to miss a mortgage payment or you are in jeopardy of missing one. In this context it is important to note that the criteria your lender uses to determine eligibility may differ from that used by another lender. In any case, your lender will likely ask for proof of financial hardship due to:
- Reduction in income
- Change in marital status
- Greater housing costs
- A natural disaster, such as a flood, wildfire, earthquake, hurricane etc.
- A local, regional, national or global public health crisis
- Illness or disability
Now you may be wondering, does applying for a loan modification stop foreclosure? You may also be wondering, can a loan modification stop foreclosure if your application is approved? The answer to the first question is, “no.” Simply applying for a loan modification does not stop foreclosure. If your application is approved, a loan modification may help you avoid foreclosure as long as you continue to make the modified payments.
To reiterate, a loan modification is designed to make your mortgage payments more affordable. If your application is approved after you submit it along with all of the required financial documents, your lender can adjust the terms of your existing loan in one or more ways, as detailed above.
Of course there is a catch. Mortgage lenders or their servicers often require a preliminary or trial period for loan modification. How long this trial modification lasts depends upon two factors. One is the type of mortgage you have (government or non-government backed). The second is whether or not you have missed any mortgage payments prior to applying for a modification.
This period is designed to determine if you can make the modified payments as proposed, and if it will have the intended effects. The lender or servicer will refrain from finalizing the modification if it is evident that the modification will not provide the relief you need.
During this trial period, you must make modified payments and submit any additional paperwork requested by the lender.
Permanent Loan Modification
If you successfully complete the trial modification by making required payments and submitting relevant documents, the lender/servicer can “complete” the modification. This is the point at which they apply any adjustment(s) to the loan for the rest of its life. This is also known as obtaining a permanent loan modification.
If you have any questions about how a loan modification works or whether it is a viable option for you, please contact us to arrange a free consultation.
Problems with Loan Modification
Even though a successful loan modification may stop foreclosure, the process is not perfect. Here are some common problems with loan modification:
- Delays in processing loan modification applications
- Misinformation about eligibility for loan modification
- Redundant requests for information
- Failing to make the loan modification permanent even after an applicant successfully completes the trial period
- Improper use /application of servicing fees
Foreclosure After Loan Modification
But what about foreclosure after loan modification? Is it possible? Unfortunately, it is, but only in certain circumstances. The most common of these is if you fail to make loan modification payments. This is known as defaulting on a loan modification, which we will discuss in greater detail below.
When Does Loan Modification Not Help To Avoid Foreclosure
When it comes to avoiding foreclosure, there are also some circumstances where a loan modification does not help. For instance, it is not helpful if you are seeking the modification to avoid foreclosure on a secondary residence or investment property, or if you cannot prove that you have a bona fide financial hardship. Loan modifications do not help to avoid foreclosure if you do not have sufficient income to make the modified payments.
What To Do If You’ve Defaulted On Your Loan Modification
Suppose you default on your loan modification and you are now facing foreclosure. In New York, your first step should be to contact experienced loan modification and foreclosure attorneys for a free consultation. Based on our findings we can help you file an answer in response to the summons and complaint detailing the foreclosure. This is a critical step in preserving your legal rights.
We can also represent you when the matter is transferred to the Foreclosure Settlement Part. This is when we will meet with the lender’s or servicer’s representative, their attorney and a court-appointed arbiter to negotiate a new loan modification to stop the foreclosure. In a best-case scenario, we will reach an agreement and the lender will extend an offer to modify the mortgage loan for good. The foreclosure case is resolved once the offer is finalized.
What Are The Alternatives To a Loan Modification
While considering loan modification vs. foreclosure, loan modification is clearly a more appealing option. As we have discussed, however, there are times when it is not an option or it does not work out. Fortunately there are also alternatives to loan modifications. Keep reading.
Filing for Bankruptcy
Pursuing a Chapter 13 bankruptcy can provide temporary relief from foreclosure. However, experts recommend that homeowners only consider this option if all else has failed. This is because Chapter 13 bankruptcy remains on your credit report for 10 years.
A repayment plan is an arrangement in which the lender agrees to apportion any late payments and add them to upcoming payments.
A Short Sale
This is an arrangement in which the lender allows a homeowner who is struggling financially and has fallen behind in their mortgage payments to sell the house for less than they owe. The lender then uses the proceeds to forgive the outstanding debt.
Lenders agree to a temporary halt to mortgage payments, or a reduction in mortgage payment amounts, for a specified period. Homeowners must resume making regular mortgage payments at the conclusion of said period. As we previously noted, a New York State law enacted last year makes this option available to qualified homeowners affected by COVID-19.
Get Legal Advice about Foreclosure After Loan Modification
Clearly foreclosure after loan modification is a complex issue with serious ramifications. Therefore, it is important to get proper legal advice from dedicated attorneys familiar with this matter. Do not leave anything to chance, contact us to schedule a free consultation today.
A: Yes, it is possible but the likelihood of obtaining a second loan modification will depend on your individual circumstances.
A: In general, a loan modification is a better option if you are trying to avoid foreclosure because it changes the terms of the existing mortgage rather than creating a new mortgage.
A: Yes, but you usually have the right to appeal. Be sure to get specific details about why your application was denied and whether there is a deadline for filing your appeal.
A: No; when possible, mortgage companies will work with the borrower to work out a plan. Foreclosures are a long and expensive process.
A: Yes! If you are behind on your mortgage payments, your lender is only required to accept late mortgage payments if they bring the account current. Otherwise, the lender is not required to accept partial payments.