Mortgage modifications being given out right now are hurting people in ways they wouldn’t have expected.
There are several different ways the lenders are approving the loan mods. Some lenders are forcing borrowers to quit making payments for a few months before they’d be able to put them in the system for the modification. Now it’s the other end of the spectrum. Some lenders are modifying loans unilaterally, without having the borrower having to go through the entire qualifying process.
Regardless of the mode of getting the modification, once the modification shows up on your credit report, you’re going to have a hard time getting a new loan. Even with the rest of the credit package, income, reserves, etc is solid, the lenders have an overlay underwriting guideline that they won’t approve a new loan if a loan mod appears on the credit report. There was always an issue if there were mortgage lates, regardless if they were to qualify for the loan mod, but even with a clean credit history and an 800 FICO, the lenders are declining loans.
I have found a few lenders that have a 3yr seasoning guideline, and some flexibility if the new loan is being used to purchase a new residence, but the guidelines are a moving target and changing constantly.
Also look at the terms closely if you’re being offered a loan mod. The majority I’ve seen, basically just kick the can down the road by locking the loan for 3-5 years at a low rate, but then jumps up to market level. The rates won’t as low as they are now in 5 years. The could help you out during todays trying times, but believe me, the loan mod isn’t really to help you the borrower, it’s more to help the lender avoid more strategic defaults. If they have to foreclose in the future, it’ll be easier for banks to deal with it. If they really wanted to help you out, they’d lock it in for a full 30 years at the lower rate.