Does Owning Rental Property Affect Mortgage Modification?

Collecting rent from an investment property can help or hinder your mortgage modification request. If you are claiming financial hardship, rental income may serve to convince the bank you dont truly need to modify the mortgage. If you are simply reconfiguring your loan, strong rental income and an additional piece of collateral can help convince the lender to follow through.

A borrower wants to change the term of his loan. The most common terms modified are interest rate and monthly payment. The borrower contacts his lender and goes over his situation with a representative. He fills out an application or provides a formal request in writing along with supporting information such as financial documents, bank statements and copies of leases. The bank reviews this information and the borrowers situation and approves or denies the modification. If approved, the borrower will file a number of modification documents and the bank will change the terms once the documents are in effect.

The bank verifies rental income through the borrowers financial statements or through a copy of a lease agreement. An individual claims rental income on Schedule E of his federal tax return. Submit your tax returns along with your modification request. If you are requesting the modification because you are having trouble making payments, the bank may analyze the rental income and see that you do have the capability to pay the loan as it currently stands. It may also review the financial statements and see that the rental property is a drain on your income and deem the modification necessary. If you are requesting a shorter term with a larger payment or an increase in your loan amount, the rental income may support the increase along when supplemented with your regular income.

Not only does your rental property serve as an extra source of income, it can also be an additional piece of collateral if your lender is hesitant to approve the modification. If your bank lends up to 80 percent of the value of your primary residence, you can borrow $80,000 on a $100,000 piece of property. If you own a $100,000 investment property without any existing mortgages, you can borrow up to 70 percent or $70,000 on that piece of real estate. Even if you dont want more money, the bank may take the additional collateral if your financials indicate your income is borderline sufficient to support the modification.

The existence of mortgages against your rental property can be a factor in your mortgage modification. If you have fallen behind on these mortgages, your credit score will suffer. If you carry large monthly payments, the bank may determine you are not capable of supporting an increase. If the mortgage is close to the maximum loan-to-value, you will not be able to offer the property as additional collateral. On the other hand, the hardships generated by the rental property can be the convincing factor in the banks approval of your mortgage modification.

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