If you feel overwhelmed because you think may need a loan modification but don’t know where to turn, you are not alone. Literally millions of homeowners are looking to get their loans modified. With all of the information circulating, many don’t know where to begin. Don’t panic. Help is available.
What Is a Loan Modification?
A loan modification, also called a mortgage modification or loan workout, is a process lenders and borrowers go through together, to change the terms of their original mortgage agreement. Loan modifications are for borrowers who are having trouble making their payments, and are at risk of delinquency, default or foreclosure. The lender and borrower work together to determine the type of solution that will be of maximum mutual benefit.
Many borrowers are already getting their loans modified. President Obama’s Homeowner Affordability and Stability plan is essentially a loan modification program that offers incentives for lenders to rework borrowers’ existing loans into new loan programs that can help keep them in their homes. Loan modifications generally cost the lender less money than a foreclosure, so lenders have incentive to help borrowers in this way.
Loan modifications are not the same as refinance transactions. Refinancing involves paying off an existing mortgage with a whole new loan. With a loan modification, a lender and a borrower renegotiate their existing mortgage contract by mutual consent.
Prepare Ahead and Avoid Losing your Home
A loan modification can help avoid losing your primary residence through a foreclosure proceeding. Unlike a regular mortgage refinance transaction, where you get an entirely new loan, a loan modification involves the modification to an existing mortgage where your lender agrees to either extend your loan term, reduce your interest rate, forgive some of your debt or add the arrears to the back end of your loan.
Each month that a homeowner does not make their full payment makes their chances for remaining in that home more and more bleak. Luckily, the United States government has recently provided roughly $75 billion towards loan modification programs. This means that a homeowner who is facing default, or even foreclosure, still has a good chance at saving their home. The thing is that they have to act fast.
Right now banks actually have waiting lists for clients seeking loan modifications, and they are simultaneously trying to prevent these same people from entering into foreclosure. The government funding has only made the entire process busier than ever, and this is the reason that the government is advocating for the use of loan modification companies and experts when possible.
Eligibility for Loan Modification
Generally, borrowers have to prove financial hardship to qualify for a loan modification. Examples of hardship include issues like job loss or cutbacks in wages and other income, as well as illness, divorce, or a death in the family. A signed statement of financial hardship is a required part of this process. As with any contract, a signed statement is an important part of the transaction. By signing a hardship agreement, you will be formally stating that the information is true and factual. In addition, you’ll have to provide proof of income, bank statements and tax returns.
A homeowner who is in default on their mortgage payments or about to go into default or pre-foreclosure may be eligible for a loan modification. The lender is most concerned with whether the borrower has the financial ability to make the new mortgage payments. The borrower must also show a financial hardship which can be various reasons such as loss of income or reduced income, a divorce, death in the family, or property value declines. The modification works best on variable interest rate loans that can be reduced by at least 1 whole percentage point.
The ideal option is always refinancing if borrowers can qualify, as it’s currently unclear how loan modifications may affect credit ratings. There’s also the short-fi option, as well as a short sale alternative.
Do I Have to Be Late on My Payments to Qualify?
You do not have to miss payments to qualify for a loan modification. Under the current guidelines for Fannie Mae and Freddie Mac, mortgage holders who are current on their payments may be eligible for help.
The Ways Loans Are Modified
In a loan modification, lenders can reduce interest rates, change the terms from an adjustable to a fixed rate, reduce the principal balance and/or fees, or adjust the length of the loan term.
The most common loan modification starts with a temporary interest rate cut, which reduces payments temporarily and gives the distressed homeowner some breathing room. The interest rate reduction usually lasts about three months, but can be extended by the lender to as long as five years. This shorter initial period gives the lender a chance to evaluate if the borrower can make payments on time. If so, there’s a better chance the interest rate cut will be made permanent.
Another type of loan modification involves a reduction to the principal balance, which reduces the actual amount owed on the house. This is usually rare, but the Obama Affordability Plan compensates lenders who grant at least a temporary reduction in principal to get monthly payments down to about 31 percent of the borrower’s gross income. Another part of the program can reduce the principal by as much as $5,000 over time if the borrower keeps current on his or her payments.
Lenders also sometimes grant a loan modification called a forbearance when homeowners are late on payments. A forbearance is when the lender agrees to not exercise the right to foreclose on a property and instead agrees upon a temporary payment plan that will bring the borrower current. In these cases, a payment schedule is drawn up and the missed payments are made up over time.
Another way loans are being modified is by extending the term of the loan. It can now be as long as 40 years.
Loan Modification Process
The government’s new regulations under the new Home Affordable Modification Program should now speed up and streamline the loan modification process. Prior to the new plan, it was taking as long as 60 to 90 days or more to get a mortgage modification application approved.
The loan modification process is not really a “do it yourself” venture. It requires formal documents that will eventually lead to a loan proposal which is presented by the borrower (or their loan modification agent) to the lender.
A good loan modification proposal will contain the following items:
- Cover Letter – This will be a very concise introduction into the contents of the proposal and will offer a brief explanation as to why a modification is being requested. It should provide a summary of the anticipated outcomes, and include the calculations that demonstrate the changes in monthly payments, terms, etc.
- Proposal Worksheet–This only looks like a simple document, but in fact it may require an extensive amount of research and data collection. It will outline the financial changes in the loan being modified and will give details about any increases in the terms or changes in the interest rates. It will also demonstrate, honestly and accurately and usually with documentation, the amount of money the home would receive in a foreclosure auction, how much it could be rented for on a monthly basis and how much time would be required to complete the process. This paints a good picture of whether or not foreclosure would be favorable or unfavorable to the bank or lender.
- Income v. Expenses Worksheet
- Proof of Income – Usually the most recent three months of pay stubs
- Most recent three months of bank statements
- Previous Year’s Income taxes and 1040s or W-2s
- Hardship Letter
- Monthly Mortgage Statement
Obviously this is a lot of data and a lot of work, which all takes time. This is the reason that anyone who is facing financial trouble or hardship, and who fears they may fall behind in their payments should contact a loan modification company and the lender as soon as possible.
Current Qualifications for Loan Modification
The Treasury Department has released the new guidelines for loan modifications under the Home Affordable Modification Program. The qualifications for loan modifications are provided below, though each individual situation will be analyzed by the lender and it is recommended that homeowners seek professional advice before beginning any discussion of a loan/mortgage modification.
With that being said, the following homeowners are eligible for financial assistance on home mortgages:
- The loan to be modified must have been originated/closed on or before January 1, 2009.
- Only owner-occupied properties with a primary loan balance under $729,750 qualifies. Higher loan amounts may be approved if the property is a multi-unit (2-4 units) residential home.
- In order to be eligible, all borrowers must fully document their income sources. A signed copy of IRS 4506-T form along with recent pay stubs and tax returns must be presented at the time of making the modification application.
- An affidavit stating the financial hardship must also be signed.
- The owner occupancy is verified in a number of ways. Any discrepancy that cannot be explained may lead to your ineligibility. Borrower’s credit report may be accessed for this purpose. Strictly no investment properties, second homes or vacant, condemned properties are considered.
- The participating mortgage lender and servicer should have the eligibility to receive federal incentives to perform loan modifications for borrowers under financial duress.
- The entire loan modification should be completed by December 31, 2012. A loan is only eligible for modification a single time.
Troubled homeowners can contact their loan servicer or lender directly or sign an authorization letter authorizing their attorney, mortgage broker, housing advisor or other representative to negotiate their loan modification on their behalf and stop foreclosure on their house.
The negotiator will present an offer to the borrower and the borrower has the opportunity to counter the offer or accept it. The borrower must have sufficient income to be able to pay the new mortgage payment. So if you do not have any income, you will not qualify for a loan modification.
Loan Modifications and Upfront Costs
We do not endorse any individual or firm that charges an upfront fee, unless they’re nominal processing fees, $100 or less. Servicers charge administrative fees, typically ranging between $300 to $600, only upon the successful completion of a loan modification. Fees are paid at closing and are often added into the principal balance of the newly modified loan. Many companies, individuals and even law firms are charging $1,000 or more in upfront fees. If you encounter one of these companies, steer clear.