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Mortgage loan modification: Keeps foreclosure away

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 13th Nov, 2007 03:08am
If you're facing financial hardships and almost on the brink of foreclosure, then you can negotiate with your lender for a workout plan to avert foreclosure. You have few options available before you to avoid foreclosure. These options are deed in lieu, short sale, forbearance and of course loan modification.


What is a loan modification program?

Mortgage loan modification is a program where your lender agrees to reduce your mortgage rate, extend the loan term, change the type of the loan etc in order to lower down your monthly payments.

Are you eligible for mortgage modifications?

You may be eligible if:
  • You're at least 3 months delinquent on the loan.
  • You took out the loan more than 12 months ago.
  • You have stable income.
  • The property has not been sold at a sheriff's sale.
  • The property is in good physical condition.

What are the different loan modification programs?

There are a few modification programs which have their unique features. Here we briefly discuss about 2 most prevalent programs.

Treasury Loan Modification Program
This program has been designed by the Obama administration in association with the US Treasury. This is a very inclusive program in the sense that it is not only helping the homeowners currently in financial difficulties but also assisting the homeowners who have lost significant equity in their homes and who are foreseeing tough financial times ahead.

Federal Housing Finance Agency Loan Modification Program
This is the newest mortgage modification program offered by the Federal Housing Finance Agency (FHFA). FHFA serves as the supervisory regulator of Freddie Mac and Fannie Mae. This program is only applicable to the mortgages held by Freddie Mac and Fannie Mae.

When is loan modification right for you?

Loan modifications are right 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.

What are the benefits of loan modification program?

This mortgage program alters the terms and conditions of a loan that has been agreed upon between you and your lender. Some of its benefits are listed below.
1.  Averts foreclosure
With this you can avoid the severe negative consequences of foreclosure and short sale.
2. Restores credit score
With this you can protect your credit score. Foreclosure damages your score badly and it remains on your credit report for around 7 years.
3. Lowers principal balance
Principal balance is the amount of the loan amount (without interest) that has to be still repaid. Sometimes, be negotiating with the lender, you can lower down the remaining principal balance.
4. Reduces rate of interest
This mortgage program may help you lower down the rate on the loan. This in turn makes payments more affordable for you.
5. Extends the loan term
Loan modification may extend the term of the loan. With extension of the loan term, rate gets lowered. This actually helps you make payments easily.
6. Converts ARM to FRM & vice versa
This offers you the chance to convert an adjustable rate mortgage (ARM) to a fixed rate mortgage (FRM) and vice-versa. You may be willing to switch to the safety of making fixed payments offered by FRM from your existing ARM. Again, the rate on your existing FRM may be too high. In such case, you may want to convert FRM to ARM.
7. Waives off late charges
Your late charges may sometimes be waived off by your lender.

What should you remember at the time of loan modification?

While negotiating on a mortgage modification, you should keep in mind the following points:
  1. Check out your financial health: You need to review your finances carefully. Lender may ask a personal financial statement from you. You need to keep that ready. Your financial statement should contain a comprehensive list of all your expenses such as credit card bills, utility bills, food expenses and other financial obligations. You should estimate the average expenses on each item for the 3 months in order to better assess your financial health.

  2. Prepare a hardship letter: In order to apply for a loan modification, you need to prepare a hardship letter . The hardship letter should satisfactorily explain the reasons behind your inability to pay off the mortgage. It should also explain why you are looking for loan modification.

  3. Gather necessary documents: Before offering you a mortgage modification deal, lender asks for certain documents. You need to keep these documents ready. These documents include :
    • Your bank statements and pay-stubs of last 2 months
    • W-2 form of last 2 years in support of your annual wage and taxes
    • 1040 Form of last 2 years as a proof of annual income tax returns
    • Latest mortgage statements
    • Hardship letter
    • Current property tax statements, if available
  4. Intimate your lender about your position: It is wise to intimate your lender about your financial position. If you are unable to keep up with the mortgage payments, lender may offer you a loan modification program. But, for that you need to contact your lender

  5. Complete the necessary paperwork: Before approving your loan modification appeal, lender sends a financial worksheet to you. You need to fill up that worksheet carefully and send it to the lender along with other necessary documents. After receiving all these, lender assesses your financial health and determines whether you can repay your mortgage after modification.
    What you need to show is that you are still able to repay your mortgage even if you are not able to meet your current monthly payments.

  6. Get a written agreement:   If the lender agrees to modify your loan, you should obtain a written confirmation from the lender. Mere verbal confirmation won't suffice .

  7. Follow the stop gap repayment arrangement: If you apply for loan modification program, lender can't offer it to you with immediate effect. It requires some time (maximum of 60 days) for the lender to make the offer. This time gap is required to check your financial statements, loan status and other documents. During this time, lender wants you to follow a stop gap repayment plan.
Not all the mortgages are ideally suited for modification. If a loan carries high rate in relation to the current market rate or if the homebuyer has a low loan-to-value (LTV) ratio, then it may be appropriate to modify a loan.

What are the outcomes of a mortgage modification?

  • You can keep up with mortgage payments.
  • You can convert your ARM into a fully amortized FRM.
  • The principal, interest, taxes and insurance (PITI), may be or may not be included in the current loan balance.
  • If the past dues are added, the modified principal balance amount may be more than 100% of the LTV of the original principal balance.
  • Modified loan balance may include administrative charges caused due to the cancellation of foreclosure.

How much time does loan modification take?

You have to wait several hours to file your loan modification appeal. When your turn comes, you have to present your case confidently. You should have all the relevant documents ready with you. This is not a very easy task.
You may have to wait for several weeks to get the final modification offer after your case gets registered. Your lender may tell you about your course of action in the meanwhile. You may be told by the lender to keep on making payments so as to qualify for loan modification. You need to follow it seriously so as to get the approval.
The purpose of loan modification is to ensure that you can better afford your mortgage payments. Make sure you don't miss payments under the modification agreement, as the lender will consider it a new default and it will be harder to negotiate a second modification. With each default, the chance of losing the home in foreclosure rises.

Related Readings
Posted on: 13th Nov, 2007 03:08 am
I was out of work for 3 months back in the late spring and early summer. After I obtained a new job I spoke with my lender and they wanted me to pay a three month "good faith" payment which was only a little above my current payment. I paid those 3 "good faith" payments and now I received a loan modification letter. The letter sets my loan back to 360 months and totally offsets the 2 years I have been paying on the loan. I owed 78,000 on my home and now according to this i will now owe 84,000. THis also increased my monthly payment by over $105 a month. THere is no way I can afford this. I thought a mortgage modification is supposed to help not hurt?? Any ideas on what I should do, I am very confused and lost. THanks in advance.
meta title: 
Mortgage loan modification
If I have a fixed rate on a 5 year arm and paying the minimum payment instead of the interest only or 30 year option may Indy Mac offer relief to me?
Posted on: 26th Sep, 2008 02:52 am
Hi Scott69!

In my opinion, a 30 year fixed mortgage is always better than a 5/1 year ARM.
Posted on: 26th Sep, 2008 04:24 am
hi,
i have filed a chapter 13 bankruptcy 2 years ago, and this did not work for me. i converted my chapter 13 to a chapter 7. iam in the rears with my mortgage lender about 20k, will a modification work for me? will they want too much up front?
Posted on: 29th Sep, 2008 09:01 am
Hi mortgage info!

Welcome to the forums!

As far as I know, you can go for loan modification. Yes, the lenders may demand too much upfront. Again this will vary from one lender to another.

Sussane
Posted on: 29th Sep, 2008 11:58 pm
I asked my lender if we could have a loan modification due to we could not afford the repayment plan. It has taken them a long time to let us know if we qualified or not, they said we did but they want us to western union $500 or money gram it before we recieve any paper work or before they submit the paper work to the investor. I am a little scared to send the money, because we were headed for foreclosure and they claimed that they put foreclosure on hold until the investor looks over and approves the modification.
Posted on: 09th Oct, 2008 05:25 am
Hi Pam

I can understand your situation. You can speak the lender and check with them if you can personally give them the money rather than sending it through western union or money gram. You can even ask if they will be giving you a receipt of the transaction.

Thanks,

Jerry
Posted on: 10th Oct, 2008 03:58 am
HI I have a home in Georgia. Here the rule with foreclosure are very quick for the state. The lender can take the house back in 60 days. I contacted IndyMac Fed Bank and asked for a loan modification, even though I am current, due to a layoff at my job. I found a new job but it pays less. IndyMac said they would not do a loan modification for me since I was NOT behind on my mortgage. My concern is that I was reaching out to them to help me. The problem is how do I know they won't foreclose on me before I get help to modify my loan? Since it didn't work with going to the lender directly, should I find a loan modification company and can you recommend a "honest and reliable" one?
Posted on: 04th Nov, 2008 01:53 pm
Hi Cindy!

As you are not late on payments, the lender will not agree to give you a loan modification. You can have a talk with the lender tell him your situation. If not loan modification, the lender may agree on some other plan.

There is nothing called loan modification company but yes there are loan modification specialists who can talk to the lender on your behalf. You can speak to one of those specialists.

Thanks.
Posted on: 05th Nov, 2008 12:01 am
we live in vegas and my husband lost his job 4 months ago - we have a mortgage of 268,000 and have not been able to pay it the last two months - since all the homes in vegas have lost value of about 50% our home is only valued at maybe 150,000 now - where can be go for help without letting our house go into foreclosure?
Posted on: 15th Nov, 2008 05:07 pm
Posted on: 17th Nov, 2008 04:21 am
Would you please recommend the broker that can help me negotiatate with my mortgage for the forberance? I have mortgage with Citilending mortgage. I got denied for the loan modification plan. I really don't know what to do. My husband got laid off almost 1 year and he tried to find a job but there is nothing for him at all so we have to take over the restaurant business. I restuarant just open and it still hasn't make money for our expenses yet. I also got diganosted for a breast cancer so we are in a very bad situation right now. I really don't know who can help us. If you can recommend the company that really can help us not just try to get our money; I am really appreciate it. my email address is "tammy0712@bellsouth.net"

[Lin deactivated as per forum rules. Thanks.]
Posted on: 14th Jan, 2009 04:12 pm
welcome guest,

i can understand that you are going through a tough situation right now. be patient and i think you will be able to come out of the situation. as far as a loan modification is concerned, did the lender give you any reason as to why they have denied it?

lenders accept a loan modification mostly when you have been delinquent on your payments for a month. in case, if you are current on your payments, then the lender will not accept it. you can contact a loss mitigation expert who can help you in negotiating with the lender.
Posted on: 14th Jan, 2009 09:31 pm
i have been in the process of "working" with my lender on a loan modification since september. this is the only option we have left. we wanted to downsize and lower our house payments for over a year, but because of the market conditions/economy, could not refinance because there is no equity and we can't sell because of all of the vacant and foreclosed homes already saturating the market in our area that have brought our values way down.

our goal (with the modification) is to lower the monthly payments on our mortgage and the principal balance. i can't see how the bank will be able to lower the monthly payments without lowering the balance. our home's current value is less than half of what we paid in 2006. we do not have a sub-prime loan or any other liens on the property. despite putting $20k down at the time we purchased it, poof.....it's all gone!

my lender sends letters to us stating that they have no interest in foreclosing on our home (or anyone else's) and wants to work with us to preserve our homeownership status. i just don't understand why they are taking so long to present an offer or give us a denial letter? are these institutions that overwhelmed? why drag it out for months?

also, i was wondering if anyone out there knows the success rate of a bank lowering the principal balance on the loan to fit what the current value of the home is? in my opinion, it does not make sound financial sense to continue to pay on a home loan of $360k when the house is now worth $160k. hopefully the bank will work with us. if not, the sad fact is they will have another foreclosure to add to their books. if we have to move, it will be an emotional time for sure :cry: , but i think we would rather take the 7 year "hit" to our credit score then continue to throw good money at bad money any longer. any thoughts or comments would be greatly appreciated.
Posted on: 15th Jan, 2009 01:46 pm
I don't want to pay big bucks to someone to help me do a loan mod. I found several e-books online that look great. The one I liked the most was called Loan Mods Done Right. it was from loanmodificationbookstore .com. It was only 20 bucks, and offered tons of free stuff with it. Has anyone tried an e-book to negotiate their loan modification?
Posted on: 15th Jan, 2009 04:23 pm
do I really need to pay $$$$ for a loan mod. I thought they were free. what about an e-book to do it. I see them everywhere online. The prices are all over. 20-500 bucks. I found what looks like a great book at loanmodificationbookstore .com that looks excllent for only 20 bucks. Has anyone tried it?
Posted on: 15th Jan, 2009 04:28 pm
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