ARM Loan Modifications: Adjusting to Fit Changing Needs

Adjustable-rate mortgages come with an initial interest rate that is lower than the interest for a fixed-rate mortgage. While the lower rate can make ARMs appealing to some home buyers, there are some downsides, particularly when the initial period ends and the rate fluctuates, sometimes substantially. For some homeowners, an ARM loan modification is the solution.
Here at Addition Financial, we understand that ARMs come with potential pitfalls for borrowers, and that’s why we offer an ARM that includes a conversion option for those homeowners who want to switch to a fixed-rate mortgage after the initial period. A conversion is a type of ARM loan modification. With that in mind, here’s our explanation of ARM loan modifications, with details on what they are, how they work, and how to get a mortgage modification if you need one.

What is an ARM modification?

An ARM modification is a change made to an existing adjustable-rate mortgage, typically designed to make the mortgage terms more advantageous and affordable to the borrower. 

Unlike refinancing, loan modification does not entail taking out a new loan. Instead, it changes the terms of your current mortgage. Lenders are under no legal obligation to approve a loan modification, but they may do so if you can prove that financial hardship may prevent you from making your monthly mortgage payments.

Loan modifications may sometimes be negotiated by a third party, but you should know that if you use someone else to approach your lender and negotiate modifications, you will be charged a fee.

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Examples of ARM loan modifications

There are several types of ARM modifications that lenders may approve when a borrower has demonstrated financial hardship.

Loan term modification

A loan term modification can reduce your monthly payments by extending the term of your loan. With additional monthly payments and more time, you can benefit from a reduced monthly mortgage payment as a result. You should keep in mind that with a longer loan term in place, you will pay more interest over the entire term of your loan than you would without a modification.

Loan structure modification

A loan structure modification changes the structure of your loan from an adjustable-rate mortgage to a fixed-rate mortgage. We already mentioned that Addition Financial offers ARMs with a conversion option. In exchange for a fee, you can convert your ARM to a fixed-rate loan. Your interest rate may increase but you’ll have the peace of mind of knowing that your rate won’t change in the future.

Interest rate modification

An interest rate modification may not always be an option, even if you qualify for an ARM modification based on your financial situation. However, if interest rates have dropped, you may be able to get your lender to modify your loan agreement with a lower interest rate, which will also result in a lower monthly mortgage payment.

Principal forbearance modification

If you need a significant loan modification as a last resort to avoid foreclosure, your lender may agree to set aside part of your principal temporarily to reduce your payments. In most cases, you’ll need to agree to a payment plan. When the trial period for your payment plan has ended, there are two options. Your lender may agree to settle some of your principal, or you may be on the hook for higher payments to catch up to where you would have been without the forbearance.

How does a loan modification work? 

Like your mortgage, a loan modification has requirements you must meet and other limitations. As we noted above, most lenders will need to see proof of financial hardship before they will consider you for a loan modification.

For that reason, the first step in getting a loan modification is to talk to your lender. You can find resources related to loan modification on the HUD website. You’ll need to make sure that you qualify and pay attention to any exclusions or limitations. Some examples include:

  • If your loan originated through Fannie Mae or Freddie Mac, you’ll need to have owned your home for at least 12 months to qualify for the Flex Modification program. You may not have modified your loan more than three times.
  • If you have a VA mortgage, you may not have modified your loan within the past three years if you want to be approved for a loan modification.
  • You must have stable income and a provable financial hardship to qualify.

Here are the things that may be counted as a financial hardship for the purposes of loan modification:

  • Unemployment
  • Permanent or long-term disability
  • Divorce or legal separation
  • Extended illness
  • Death of a primary borrower
  • Natural disaster
  • Changes to your housing costs or income that are out of your control
  • A job change that requires you to relocate more than 50 miles

If you have experienced one of these things, then you may qualify for a loan modification.

What are the steps to an ARM loan modification?

Here are the steps to follow if you want to pursue an ARM loan modification:

  1. Gather proof of your financial hardship. You’ll need to demonstrate how your financial circumstances have changed, so you’ll need before and after proof of income, how your change in income has affected you financially, and proof that you still have the financial means to commit to a payment plan.
  2. Contact your lender or loan servicer. After gathering your proof of financial hardship, you’ll need to get in touch with either your lender or loan servicer to talk about a loan modification. You should be prepared to answer preliminary questions about the documentation you’ve gathered.
  3. Complete the loan modification application. To support your application, you’ll need to provide the documentation we listed above. You’ll also need to provide consent to run credit checks on you and any co-borrowers, current balances in your bank accounts and investment portfolios and information about any real estate you own other than the property where you’re requesting the loan modification.
  4. Make trial payments. During the period when you’re waiting for approval of your loan modification, your lender may ask you to make up to three trial payments to make sure that you’re able to commit to a payment plan. It’s essential to make these payments on time if you want the modification.
  5. Wait for your loan modification decision. Your lender will notify you by mail if you have been approved or denied a loan modification. If approved, you’ll receive an updated loan agreement and a new payment schedule to follow.

Keep in mind that following these steps is not a guarantee that you’ll be approved for modification to your adjustable-rate mortgage.

How long does it take to get a loan modification?

One of the questions that people ask about loan modification is how long it will take to get one. While the answers vary from lender to lender, you should expect it to take as long as 90 days to get approval for a requested modification.

The potentially long wait for a modification is the main reason we suggest notifying your lender of your financial situation as early as possible. When you get an approval for a loan modification, you will receive an offer that outlines the loan modification terms which may, as noted above, include trial payments.

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Will getting an ARM loan modification impact my credit?

One concern that looms large for anybody pursuing an ARM loan modification is how and if the modification will affect their credit score. There are two things you should know.

The first is that if you are already delinquent on your loan payments, your FICO score will take a hit. 35% of your score is determined by your payment history and late payments will impact your score. The tricky thing about loan modifications is that some lenders require a borrower to be delinquent before they will consider modification.

The second thing that may affect your credit score is how your lender reports the ARM loan modification to the credit bureaus. Some lenders may report the adjustment as a settlement or adjustment to the original terms of the loan. If they report it in such a way that it shows up as not meeting the original terms, it can have a negative impact on your credit score. That said, it will have less impact than continued delinquency or foreclosure.

Is a loan modification a good idea?

Loan modification is a good idea for people who know they’re going to have difficulty making on-time loan payments for the foreseeable future. If you have experienced a loss of employment or income or some other hardship, then a loan modification may be the best way to avoid foreclosure.

If your primary concern is rising interest rates, then refinancing your ARM into a fixed-rate mortgage may be a better option. You’ll need to be sure that you have enough money to pay the closing costs, but with sufficient equity you may be able to take cash out to cover those expenses.

Get an affordable ARM with Addition Financial

ARM loan modifications are an option for people who are facing significant financial hardship that may make it difficult to make their monthly mortgage payments and avoid foreclosure. The details we’ve provided here will help you apply for a modification if you need one.

Do you need an affordable mortgage? Addition Financial is here to help you! Click here to read about our mortgages, including an affordable ARM with a conversion option after the initial period, and start the application process today.

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.