What's the best way to update a mortgage with a loan modification

alther

I had my mortgage set up for forbearance for 12 months. After that time, I entered into a loan modification. What's the best way to track that in Quicken? With a refinance it's easy. But with the forbearance and modification, there is 12 months of interest, trial payments before the modification goes through and then finally the new terms. Should I treat it as a refinance and just create a new mortgage? Is there a better method?

Tom Young

Without knowing the real details it's tough to provide a detailed answer.  "The devil is in the details" is an (idiom?, aphorism?) that particularly applies to accounting.

"I had my mortgage set up for forbearance for 12 months."

It sounds to me like for 12 months you didn't pay your mortgage, and nothing bad happened, or at least nothing happened that you could quantify and describe in detail.  Presumably you made no entries in Quicken during this time.

"After that time, I entered into a loan modification. What's the best way to track that in Quicken?" "...there is 12 months of interest...,"

If you are making interest only payments for 12 months - presumably some sort of "catch up" on the interest you didn't pay for 12 months - then one way of handling this would be to simply enter the payment in your checking Account with the entire amount going to whatever mortgage interest Category you used in the past.

"'trial payments before the modification goes through"

Now that's where things become particularly murky.  I have no idea what that means as a practical matter.  It sounds like there might be an element of both "principal" and "interest" to these payments - that's not entirely clear - but what are those payments based on?

At this point I'd have to guess that there's no Quicken loan "wizard" that's going to guide you here or that you can use until you get to the the point where the "modification goes through", which sounds like an explicit refinance.  Presumably you'll have to make some manual entries, maybe to the loan principal, probably for the trial period payments, until things settle down and you've once again have a normal amortizing mortgage loan.

Mark1104

as pointed out above, this is rather tricky

here is how I would do it.

1) set up a new loan account called 'forbearance'.  Post the 12 months of INTEREST (not the principle) in this account.  The principle balance on the original loan should not change. 

2) during the trial period, all the payments are going to pay down the back interest in the forbearance account. 

3) once the modification closes, the outstanding interest normally gets capitalized onto the existing mortgage, so move the remaining dollars from forbearance account to the loan account.  And then adjust the amortization on the original loan to reflect the new payment, the new principal balance and the new interest rate and term. 

alther

@"Tom Young" Sorry, I thought since many did a forbearance and modification during COVID, the process was pretty standard.

During the forbearance period, no payments are made. Interest accrues and they still make escrow payments, so the escrow balance goes negative.

The trial period is a 3 month period where you make payments similar to what your modification will result in. I actually don't know how those 3 payments are applied - all interest, escrow, broken out like a standard payment? I don't quite know yet.

After the trial period, the modification becomes permanent. The interest and escrow debt acquired during the forbearance are tacked onto the principle and the new rate and duration go into effect. It's not quite like a refinance - same account number and no fees, but it's similar.

Mark1104

@alther -follow my suggestions.  Those trial payments are all a paydown of missing payments from the past 12 months (except for principle). 

 There is a prescribed order that payments are posted against what is outstanding.  It's in your mortgage note.  unpaid interest is first. 

suggest obtaining a copy of your monthly transcript from the servicer as it will show how it is tracking what is owed and what it is paying down as you make a trial payment.   

if the interest rate for the modification doesn't change and the loan term is only extended by the number of months of the forbearance, the monthly payment should be about the same for the modification  as it was before the forbearance began (maybe SLIGHTLY higher since the missing escrow payments are being capitalized as well.) 

I used to work in mortgage servicing so I am familiar with what you are asking, 

alther

Hi @Mark1104 . I tried creating a Forbearance loan, as the first step, but it won't let me because I have a $0 starting balance. Or should I simply enter in the final total of the 12 months of interest as a starting balance? Or a different type of account where I can add the accumulated interest each month, per the statements?
Thanks.

Mark1104

yes, just use the 12 months of interest....since it is a temporary account, it might be easier to use an 'other liability' instead of a loan account ("debts other than loans" - even though the deferred interest is a loan - sorta-)

alther

@Mark1104 Sorry for the delay, but I finally resolved this (at least things balance out). I started out doing what you suggested, but it turns out that didn't quite work, which I'll explain below.

What I ended up doing was this:
- Created a "Trial Payments" account to track the 3 trial payments because the 1st payment was "unapplied". The 2nd & 3rd payments were the regular payments, picking up right where I stopped with the forbearance. Since the regular payments were more than the trial payments, the difference was picked up from the "unapplied" 1st payment. After the 3rd payment and the new mortgage went into effect, the remaining "unapplied" amount went to pay down the interest.

- I didn't make "forbearance interest" account. I simply added an interest line in my mortgage account to add the interest. That plus the escrow deficit payment from the account made it balance to what my statement said.

- I had to create a whole new Loan account to track the new mortgage terms. I tried adjusting the existing account, but it would never change the payoff date - it always remained the original date.

- Once the new Loan account was created, I balance adjusted the original loan to $0.

Thanks all the help. It got me 90% of the way. Appreciate it.