Loan Modification Vs FHA – A Comparative Analysis

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A loan modification is when a borrower has the terms of his or her mortgage modified in order to make the loan more affordable. This is done when a loan becomes too expensive and a borrower finds themselves struggling to make their monthly mortgage payments. Generally, modifications are completed in situations where a borrower may be facing foreclosure unless the loan is made more affordable, yet they are unable to refinance their loan, due to insufficient equity in the home.An FHA loan is a mortgage loan that is backed by the Federal Housing Administration. These loans were created to be more affordable than conventional loans, as well as easier to obtain. This helps families with moderate or low incomes and less than perfect credit, become homeowners, even though they would be unable to qualify for a conventional one.The Differences Between Mortgage Modification and FHA Loans:The main difference between loan modification and FHA loans is that an FHA loan is a federally insured, affordable loan, while a modification refers to changing the terms of a loan. A home buyer could obtain a FHA loan while purchasing a home, but could not modify their loan until the payments became so expensive that they were unable to pay. A modification is usually not obtained until a homeowner’s financial situation becomes so dire that they are facing foreclosure.Additionally, mortgage modifications are completed on loans insured by Freddie Mac or Fannie Mae, not by the Federal Housing Administration. When FHA ones become too expensive, they are usually refinanced, not modified, as refinancing is an easier process to qualify for. This is because of the Hope for Homeowners program, which allows homeowners to lengthen their loan to 40 years, refinance 96.5% of their home’s value, and be excused for any debt over 96.5% of the home’s value.The Similarities:The main similarity is that these programs were both designed to help homeowners avoid foreclosure and be able to afford their mortgage. The Hope for Homeowners program also makes refinancing an FHA loan decently similar to a loan modification. This is because this program forces lenders to forgive any debt that a homeowner has over 96.5% of the value of their home, while allowing homeowners to change the terms of their loan to make it more affordable. Therefore, while there are differences between FHA loans and loan modifications, there are important similarities that will help homeowners avoid foreclosure and improve their finances.

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