A loan modification is a common method used to avoid foreclosure. In 2009, President Obama implemented the federal program called, Making Home Affordable. The program helps homeowners modify their mortgages by adjusting one or more loan terms. If you are considering a modification, you may wonder if it will affect your ability to sell your home. Fortunately, a loan modification does allow you to sell your home.
How a Loan Modification Works
A loan modification is when the lender adjusts the terms of the loan, or in rare cases the balance, to make the payment more affordable. The interest rate and length of the loan are commonly adjusted. Sometimes, a portion of the principle is forgiven to reduce the payment. An interest rate can be reduced down to as low as two percent. The length of the loan can be extended to a 40-year loan, rather than a traditional 30-year loan.
If you are interested in a modification through the Making Home Affordable program specific criteria must be met. To be eligible you must be unable to afford your current mortgage payment -- lender requirements may vary -- however, your home must be your primary residence. As of 2011, your loan must also be acquired before January 1, 2009, with a remaining balance of $729,750 or less. You must suffer a financial hardship that affects your ability to pay, or experience a mortgage payment increase due to an adjustable interest rate. The mortgage payment, including taxes and insurance fees, must be more than 31 percent of your gross monthly income.
After the loan modification is approved, homeowners must complete a trial payment period to demonstrate their ability to pay the adjusted amount. A typical trial period lasts three to four months. If you fail to make your payments on time, the permanent modification may not be granted. All forms and documents, such as the agreement and proof of finances must be received by your lender to verify eligibility before the trial modification period expires. The due date is indicated on your trial plan notice.
Selling the Home
You can sell the home at any time after the permanent loan modification is in effect. The sale price must be enough to satisfy the mortgage balance. If part of the principle was forgiven or suspended, that amount will likely need to be repaid. When the borrower is still struggling after a loan modification, the lender may allow a short sale. In a short sale, the lender agrees to accept less than the remaining balance on the loan.