In this down economy, many homeowners are looking to loan modifications as a way to stay in their home and avoid foreclosure.
A loan modification is much like a refinance in that the objective is to find you a more affordable mortgage payment for your financial situation. The primary difference is that instead of looking for a “new” loan you will just simply “modify” the terms of you existing loan. In most cases, a loan modification is recommended to homeowners that have incurred a financial hardship that prevents other financing or payments options.
Loan modifications take into consideration of residency type, payment history, debt load, earnings, assets, and the current value of the home. Often times in loan modifications, interest rate and amortization schedule are modified to assist the homeowner in making payments. Sometimes, decreased home value and lending law violations can compel the lender to agree to principal reduction as part of the loan modification.
The most likely candidates for loan modifications are those who occupy the property as their primary residence and have missed three or more payments as a result of:
• Financial hardship: Divorce, layoff, pay cuts, job relocation, medical, military service, death, etc can drain your savings and hinder your ability to meet monthly mortgage payments. For many, the financial hardship is temporary. If so, loan modifications can provide you with the ability to meet payments in the short-term while you work on improving your financial situation.
• Adjustable rate mortgages: A variable rate mortgage that has reset or is about to reset to higher interest rates and render payment unaffordable. If so, loan modifications can provide you with the ability to meet payments on a permanent basis.
In general, your objective in presenting your loan modifications request is to show it makes more business sense than the alternative (i.e. foreclosure) to the lender. It is important to show your lender that you have had a material change in your financial circumstances, have made every effort to make your mortgage payments, and have been and will continue to be cooperative and honest in working with them.
There are various loan modifications programs available depending on who guarantees, owns, and services your mortgage. Many of the major lenders participate in the Obama administration’s Making Home Affordable program that offers both refinancings and loan modifications. The refinancing program gives homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance. The loan modifications program aims to prevent avoidable foreclosures by helping homeowners already in or that will be in financial stress. More details about the program as well as self assessments are available at www.MakingHomeAffordable.gov
However, the process of getting loan modifications can be daunting. Because loan modifications are just becoming main stream, there is little standardization and lots of confusion. This is the main reason that many homeowners outsource the task to a professional. Here are some general guidance on how to request loan modifications:
• Contact your lender: Ask to speak with loss mitigation or home retention department. Inquire about lender specific forms and procedures, as well as the processes and associated timeline for requesting loan modifications for the various programs.
• Complete necessary documentation supporting your request: This is the most important part of your loan modifications efforts. The specifics may vary by lender, but the critical elements are typically the same. They include a letter documenting and explaining your hardship, a detailed monthly budget worksheet listing total monthly income and expenses, and proof of current income and ability to make modified mortgage payment (i.e. pay stubs, bank statements, and tax returns). Keep your documentation organized. Remember that the main question your lender is trying to answer is can you pay the new modified mortgage payment, and will you.
• Follow-up, follow-up, follow-up: Lenders are overwhelmed with requests. This is where getting loan modifications can become very challenging. Follow-up regularly to make sure that your case is being reviewed is vital. You need to verify that your paperwork has been received, find out if your case has been assigned to a case worker, call at least weekly to check on the status of your file, and record details of each contact for future reference.
• Be prepared to ask for terms: It is important to know what you can afford to pay and show the lender you are willing to make concessions by eliminating “extra” expenses such as a gym membership. Then ask the lender to work to modify your mortgage payment. If the terms the lender proposes don’t work in your budget, continue to ask how you might come to terms that will allow you to meet the mortgage payments and stay in your home.
