A loan modification changes your current mortgage contract, such as a reduced interest rate or extended loan terms agreed upon by the lender and the homeowner.
For homeowners struggling to manage or behind on their current mortgage payments, a loan modification will probably be the best option to help your current situation. The purpose is to help make your mortgage more affordable so you can avoid foreclosure.
For example, the lender modifies the existing loan(s) to work with the homeowner because of financial hardship by changing the mortgage terms from an adjustable-rate mortgage (ARM) to a fixed-rate loan. They may also extend the loan term from 30 to 40 years or decrease the current interest rate to make the monthly payment more affordable.
Every mortgage servicer in the U.S. has loss mitigation programs in place and offers loan modifications to borrowers who they deem are qualified. But please keep in mind that they are not required to modify your mortgage, and there are no laws that state they must fix your loan so you can save your home.
A key factor required in every loan modification submission is the existence of hardship. The hardship can be temporary in nature or permanent. Still, the borrower must prove the hardship such as financial hardships, job loss, loss of income, rate adjustments on adjustable-rate and subprime mortgage products, etc.
The earlier you address the issue, the better the chances of negotiating a fixed rate and a manageable payment.
What are the types of hardships?
The following list are a sample of hardships that are deemed acceptable by mortgage servicers
1. Adjustable Rate Mortgage – Reset-Payment Shock
2. Illness of the Borrower
3. Illness of a Borrower’s Family Member
4. Curtailment of Income
5. Loss of Job
6. Property Problems
7. Inability to Sell the Property
8. Mortgage Servicing Problems
9. Reduced Income
10. Failed Business
11. Job Relocation
12. Death of the Borrower
13. Death of Spouse or Co-Borrower
14. Death in the Family
17. Marital Separation
18. Military Duty
19. Medical Bills
20. Damage to Property (natural disaster or unnatural)
How does the process work?
A loan modification is simply done by negotiating a lower payment with your current lender on your current mortgage contract.
The process works by modifying and improving the current terms and/or the interest rates on your existing mortgage. Do not confuse it with refinancing because you would not be making payments to satisfy an existing loan; this means that there are no loan closing costs.
It can easily take anywhere from three to twelve months or more to complete, and in some cases up to two years or more. Even if you feel like you’re a perfect candidate for a loan modification, you will most likely have to jump through several hoops before you reach success.
Just try to always be very polite – but firm – each and every time you communicate with your servicer. Keep track of dates/times and the name of any representative you speak with, this may come in handy later if you get conflicting information from a separate department.
The key when applying for a loan modification is to have patience and be persistent. This process may take a long time and be stressful. Try to control this stress and understand that what you cannot control is not good to stress over. This is just business to these big banks and mortgage servicers. If you remember this and do the same yourself, it will help you deal with the stress and sometimes the comedy of it all.
Do the best you can, stay as positive as possible, and hope for the best. By doing this you will take care of business, and also have a life with your loved ones.
What will I need to apply?
Here is a list of items you will need when you submit your loan modification. It is best to gather all these items before you even approach your mortgage servicer and keep this paperwork all organized in a single file for quick reference and or updating.
1. Financial statement
This worksheet can be defined as a document that contains a borrower’s monthly income and expenses that they wrote down. Accuracy of the information on this worksheet is a major factor in eligibility. The absence of debts may disqualify you, due to the fact that your servicer is going to uncover them eventually whether they are on the document or not.
2. Hardship letter
As mentioned above, hardship letters help to outline the events that have led to your mortgage becoming unaffordable. Although crucial information needs to be addressed in this letter, it also needs to be straight and to the point. Using over 2 pages to describe your situation is actually overdoing it.
3. Proof of income
Usually, income must be verified for each borrower who lives in the primary residence. Evidence of income classifies as:
– Monthly pay stubs for salaries of hourly wages.
– Most recent quarterly profit and loss statements of the self-employed.
– Copies of statements or letters from providers of the unemployed or disabled who need federal benefits to live. The statements or letters should include how long you will be receiving the benefits or the 2 most recent bank statements proving the income.
– The copies of the divorce decree, separation agreement, or other agreements in writing filed with the court explaining how much you will be paid and the amount of time in which it will be received for those who receive alimony or child support.
4. Tax Authorization (IRS 4506T-EZ Form)
Your lender needs this form for permission to request a copy of your most recent tax return from the IRS. Borrowers should make copies of this form for their own records.
5. Bank statements
At least two months of bank statements are required when applying for a loan modification. Bank statements enable a lender to see your total income and expenses and how they are being distributed each month. This transparency will help them make their decision. It is common to have to send in statements multiple times during the process, so trying not to get frustrated.
Here are some more tips to help you along in the process
1. Being punctual
Instead of waiting to default on your monthly payments, you could contact your servicer’s loss mitigation department to apply for assistance. Waiting to get into trouble never helps make a situation better. If you are suffering financially, take action. Patience is a virtue that must be practiced during the loan modification process, not before you even think about submitting the application.
As we promote nearly daily here on LoanSafe, the best way to get the best options is to do your research. While starting at resources like our own forum here on LoanSafe.org can be helpful, the best research always comes from the source. The Making Home Affordable Program, the Freddie Mac Streamlined Modification Initiative, the Fannie Mae streamline, and several other loan modification sources all have websites that anyone can go to for more information.
Hardship letters are always vital tools for borrowers who are facing the reality of foreclosure. While being comparable to hardship evidence, a hardship letter differs in that it sets the stage for a borrower to open up to their lender or servicer and allows them to be honest about their situation. Loan modification and short sale processes generally request it. Sample hardship letters and instructions can be found here on here on LoanSafe.
4. Staying organized
Because all loan modification programs request basic financial information such as paystubs, bank statements, 2 years’ worth of tax returns, recent mortgage statements, and a financial budget you have, the organization is more vital than ever when pursuing a loan modification in 2014.
5. Remaining assertive
When trying to get a loan modification in 2014, you’ll want to remain respectful while at the same time never taking no for an answer. Because the submitting of an application requires constant follow-ups on the phone, it takes the right type of assertiveness of the phone when going after a loan modification. Calling at least 2 times per week will help obtain a positive outcome.
6. Being realistic
Realism does not mean signing the first deal that is presented to you. Bargaining still exists in a world where regulations are ruling the industry. At the same time, remember that those with the power are the ones who make the final decisions; Especially if your loan is owned by Fannie Mae or Freddie Mac.
7. Document everything
This trait falls under the category of staying organized as well. Legal ramifications require borrowers to leave paper trails for themselves in order to get as much help as possible with the least amount of trouble possible. Keeping detailed logs, notes on conversations, and tabs on status updates are crucial tools when pursuing a loan modification this year.
8. Being patient
With some timelines adding up to 90 days to complete, the loan modification process is a process that requires the utmost patience.
IMPORTANT NOTE: It is essential during the loan modification process that you call your servicer regularly after you have sent them all your paperwork. Finding out which department is handling your file is crucial as well.
Where can I find more assistance?
What if I need help negotiating with my lender or do not have enough time to call in weekly for updates?
For those out there who need some housing counseling, I suggest you visit the Consumer Financial Protection Bureau’s (CFPB) “Find a Counselor” tool to search for counseling agencies in your area.
There are some excellent non-profit organizations out there that can assist you through this difficult process. Two non-profits I have found to be very reputable over the years are HOPE NOW and Neighborhood Assistance Corporation of America (NACA).
Now that you have some information about modifications, it is now time for you to begin the process yourself.
You can also join our free forum with any questions they may have, where you will find many homeowners just like yourself in need of assistance.
Moe Bedard is the founder and lead mortgage analyst for LoanSafe.org. Since 2007, LoanSafe has helped over 2 million consumers with solutions to their mortgage problems and has been featured in the New York Times, LA Times, Fox Business, and many other media publications.