A loan modification can give you more favorable terms, but it does not prevent you from selling your house. When you sell your house, the amount you still owe on your loan modification gets paid off first and you receive a check for anything above the loan amount. Just like a typical sale where the owner still holds a mortgage, the lender gets its money and you make your sale. Everybody's happy. The only scenario that could hamper your efforts to sell is if your loan includes a prepayment penalty.
If you sell your house after completing a permanent loan modification, the loan's total payoff amount will be paid with the proceeds of the sale to completely satisfy the loan. You get to keep any additional proceeds made from the sale.
Understanding Loan Modifications
Borrowers who request loan modifications usually intend to stay in their homes for the foreseeable future. It is of little benefit to the borrower to pay a modification fee for only a month or two of lower payments, and it is of no benefit to the lender to go through the process. The most common modification scenario is for a borrower to lower his interest rate several years into a mortgage term.
Exploring Relevant Documentation
When a lender agrees to modify a loan, the borrower signs a loan modification agreement. This document outlines all the changes to the mortgage -- most often the interest rate and the monthly payment. While there may be a clause prohibiting the sale of your property, that only means you can’t sell the property without paying the mortgage off. While the lender can’t prevent you from paying off your loan, it can discourage it through a prepayment penalty.
Identifying Prepayment Penalties
Prepayment penalties are designed to net the lender a fee to compensate for the loss of interest income resulting from a loan payoff. A typical prepayment penalty is a percentage of the principal balance to be added to the payoff amount. For example, if you have a 2 percent prepayment penalty with a $200,000 principal balance, the prepayment penalty will be $4,000.
If you don’t initially have a prepayment penalty, read your modification agreement carefully to make sure the lender didn’t include one in the modification. Typically, prepayment penalties expire after a few years, but you don’t want to limit your ability to sell your house if the opportunity presents itself.
Loan Payoff Options
When it comes time to sell your house after receiving a permanent loan modification, contact your lender and request a payoff figure. The lender will provide you with a figure in writing, including any applicable prepayment penalty. When you close on the sale, you or your settlement agent will forward the payoff funds to the lender and the loan will be paid off. It may cost you some extra money if there’s a penalty, but the fact that you received a modification can’t prevent you from paying off the loan and selling your house.
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