Lenders recognize the need to help struggling borrowers modify mortgages on their investment property. The Home Affordable Modification Program (HAMP), a government plan, covers investment property loans as of late 2012. Certain lenders for Fannie Mae and Freddie Mac loans have agreed to modify mortgages on rental properties and second homes. Investment properties can qualify for reduced payments if they meet certain criteria, either set by the government or the individual lender.
A mortgage modification typically lowers the interest rate, increases the repayment period or defers principal balance payments to make a loan more affordable. Lenders have found that in many cases, it's cheaper to modify a loan than to foreclose. The legal process of foreclosure, which allows a lender to recoup losses on a defaulted loan, typically runs between $40,000 to $80,000, according to RealtyTrac. Investment properties are homes the borrower doesn't live in for most of the year. They include rentals and second homes with one to four units.
You must be employed or have a source of income to have your investment property loan modified through HAMP. The lender will need to ensure that you can afford the modified payment and support the additional costs of rental property, such as maintenance and vacancy. The lender analyzes your income, assets, expenses and the financial hardship that made you fall behind. If your documentation shows that you can reasonably afford a lower payment, within 31 percent of your gross income, you may qualify.
Your property and the loan have to meet certain guidelines. For example, HAMP only works on loans taken out before Jan. 1, 2009. If your property is a second home or vacant, you have to rent it out after the modification. The lender considers how much the property is likely to rent for in determining whether you can afford the new payment and upkeep. A lender can request an inspection of your property to verify it is in good condition to rent. A property in poor condition is risky. Money needed for repairs adds a financial burden that can lead to future default on the modification.
Freddie Mac and Fannie Mae, two government-sponsored enterprises that own or guarantee most home loans, set modification standards for some lenders. If your rental property's lender does not participate in HAMP or you were denied for the program, your lender may still modify your loan under a different program. For example, Freddie Mac offers the Standard Modification Program, which covers rentals and second homes, for borrowers that were rejected under HAMP.
- Realty Trac: New Loan Mod Plan Open to Investment Property: New Terms
- Making Home Affordable: Home Affordable Modification Program: Eligibility
- HUD: Loan Modification FAQs: Question 2
- American Land Title Association: Fannie Mae Updates Loan Modification Requirements
- Freddie Mac: Freddie Mac Standard Modification
- HUD: Avoiding Foreclosure
K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.