Mortgage loan modification (home loan modification) is where the lender may lower your mortgage rate, or add any dues to the mortgage balance and extend your loan period. This is to ensure that your monthly payments are reduced. There can also be a reduction in the principal balance you owe. The purpose is to make your payments affordable so that you can save your credit and keep your home.
Loan modifications (mortgage modifications) are suitable for you when:
- You have experienced a long-term reduction in income.
- Your monthly expenses have increased.
- You don't have enough income to pay off mortgage dues.
- Are you eligible for mortgage modifications?
You may be eligible if:
The lender has not declared a foreclosure yet and even if they have done so, they should have removed the loan from the foreclosure status.
- You're delinquent on the loan for 3 months or more.
- The loan has been originated for more than 12 months.
- You have stable surplus income to help you pay at the modified rate/terms.
- The property is in good physical condition
How does a loan modification work?
If you're concerned about how to do a loan modification, here are 7 things you should be aware of:
- Review your financial situation: Prepare a Financial statement including a detailed list of your expenses (food, gas, credit cards and other financial obligations) in a spreadsheet and calculate the average costs on each item for the past 3 months or so. This is important because most lenders would ask you questions on your financial situation and require you to submit a Financial Statement.
- Hardship letter: Prepare a Hardship letter of not more than 2 pages wherein you'll communicate why you aren't able to carry on with the usual payments and why you need a loan modification.
- Collect documents: You need to gather certain documents that the lender may review when you request a mortgage loan modification. The documents are:
(a) Pay stubs and bank statements for the past 2 months
(b) W-2 Form for the last 2 years for the employed
(c) Form 1040 for last 2 years if you're self employed
(d) Rental Agreement if the loan is not on your primary home
(e) Most recent mortgage statement
(f) Property tax statements
- Contact your lender: Contact the lender and make them aware of your situation. The best way to communicate is by sending a hardship letter. It is easier to get a home loan modification if you're behind on payments. However, you may get approved even though you're not behind but are not sure whether you can keep up the payments.
- Fill out paperwork: Once you qualify for mortgage modification, the lender will send an information packet and a financial worksheet for you to calculate your expenses. You need to attach documents you've collected along with the worksheet. This is for your lender to assess your financial situation and interpret whether you can pay your mortgage after home loan modification.
What you need to prove by filing out the paperwork is that the loan modifications will help improve your situation and make your payments manageable.
- Written Agreement: Once the lender reviews your paperwork, he may verbally agree to modify your loan. They will also send you a document explaining the loan modification offer for your approval.
- Stop gap repayment plan: Once you accept the offer, the lender will need you to start off a stop gap repayment plan till the mortgage modification goes through. This will go on for maximum 60 days during which the lender reviews your loan status, financial statement and documents in order to assess the risks in modifying your loan.
During the stop gap period, you need to prove that you can afford monthly payments along with other expenses after loan modifications. Only then will you have a fair chance to get your loan modified.
Home loan modification may be offered alone or as a part of forbearance. However, not all loans are appropriate for mortgage modification. Loans being modified are mostly those which are above the market rates or have lower loan-to-value ratios and mature terms.
Do you need professional help?
If you cannot negotiate mortgage loan modification on your own, an attorney or a loss mitigation specialist can communicate on your behalf. Your attorney should be one who has good service background and can ensure that you get a fast response from the lender. Any foreclosure action is stopped while the attorney negotiates with your lender.
What happens when you're in mortgage modification?
- You'll be able to get current on the loan.
- If you have an ARM, modification may help you convert it into a fixed rate fully amortized loan.
- The lender may reduce the interest rate below the market rates.
- The entire PITI (principal, interest, escrow items such as tax and insurance payments etc) may or may not be added to the current loan balance.
- Any administrative fees resulting from cancellation of foreclosure may be added to the loan balance.
- The modified principal balance can exceed 100% loan-to-value or the original principal balance if any dues are added. In such a case, your monthly payments are likely to go up.
- The purpose of loan modification is to ensure that you can better afford the mortgage payments. But make sure you don't miss payments as the lender will consider it a new default and initiate a foreclosure on your home.