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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
Hi Debra,

As you're unable to pay the the dues as per your modification agreement, the lender will foreclose the property in order to recover the dues. I would suggest you to have a word with your lender and check out if he can help you in any way.

Take care.
Posted on: 24th May, 2010 03:02 am
how long does it usually take for a modification
Posted on: 01st Jun, 2010 05:26 pm
Hi Guest,

The time period required to get a loan modification approved will vary from one lender to another. You need to get in touch with your lender and check out the time period he would require to modify your loan.

Thanks
Posted on: 01st Jun, 2010 11:11 pm
After my divorce, I have been trying to sell my home now for almost 9 months w/no luck. After the loss of half the household income and have now gone through all of my savings, I can't afford my mortgage payments anymore, I really thought I would have sold the house before running out of money. I already have a bankruptcy on my credit that is a little over 2 years out (discharged) and have been trying to rebuild my credit. I have been told I have 3 options, loan modification, deed in lieu or a short sale. Since the last 2 choices will have somewhat of a negative impact on my credit, is it best to do a loan modification, even if I'm still trying to sell the house? Any guidance or advice would be greatly appreciated. Thanks in advance for any help!
Posted on: 03rd Jun, 2010 06:43 pm
hi guest!

welcome to forums!

if you want to get rid of the property, then it's better to go for a deed in lieu of foreclosure or a short sale. it is true that both of these have a negative affect on your credit. but it should also be kept in mind that a loan modification also affects the credit and lowers the scores by few points. however, a mortgage modification will help you in saving the property. so, if you want to save the property, you can go ahead with a modification.

feel free to ask if you've further queries.

sussane
Posted on: 03rd Jun, 2010 11:39 pm
I am umemploye will i be able to applied for modfication loan.
Posted on: 11th Jun, 2010 02:37 pm
Welcome lpnot,

Though you are unemployed, you should contact your lender and apply for a loan modification. As per a new law, the lender can reduce or suspend your dues for a given period of time. However, it would be the lender's discretion whether or not he would help you with a modification.
Posted on: 13th Jun, 2010 10:44 pm
Hi, I just recieved my loan mod agreement and they are adding the interest ($33,300) to my loan amount ($472,000) this brings my unpaid balance to $502,300. BofA is offering a 5 yr plan starting interest-only rate of 4% for the first yr payment $1674. 77 and to increase each yr thereafter. The final rate will be 6.5%. After 5 yrs the interest will be charged on the unpaid bal at theP&I of $3135 until P&I are paid in full (maturity date of 2037). Is this a good offer or should I try to re-negotiate to lower my Principal. Thank you in advance.
Posted on: 16th Jun, 2010 01:27 am
You should first check out whether or not you would be able to afford the payment as given by the lender. If it's affordable for you, then you can go ahead with it. If you think that the payments is not affordable for you, then you should negotiate with your lender for a principle reduction.
Posted on: 17th Jun, 2010 12:31 am
I am purchasing a new home. My existing home is paid for. I would like to take out a mortgage on the new home and when we sell the existing home put that money into the new mortgage. Wells Fargo says that they will do a payment modification once this occurs. It sound great, but is this legal?
Posted on: 20th Jun, 2010 07:07 pm
Welcome Guest,

I don't think there is anything illegal in it. Once you put a lump sum money towards the mortgage of your new property, the principle amount will get reduced and you may get a better payment plan to pay off the dues.
Posted on: 21st Jun, 2010 12:32 am
with the economy at the worst since the great depression, I don't understand why you would want to enter the home loan market when you have a home that is paid for. Please re-think your strategy.

The chances of Wells Fargo modifying your loan are slim to none. Please review the treasury report on Wells' performance in the Making Home Affordable program. Banks have paid back TARP money and have no incentive to do loan modifications. Sure they get an incentive to do a modification, but they are in the business to make money. The make more money foreclosing than they do modifying your loan.

It sounds great the Wells will modify your loan because if you proceed with your plan, they will be able to take that mortgage free house from you, and not only will Wells have the equity, they will also insure it against loss, collect the insurance money, and then be able to resell it. This process will net them a HUGE profit and they couldn't care less about you.
Posted on: 28th Jun, 2010 06:34 am
Mare Mare, are you working with an attorney or consultation firm? There are a few things that should worry you about the tiered payment system they are trying to establish. If this is thier first counter then you need someone to help you work out something better I do believe.

What state are you in?
Posted on: 15th Jul, 2010 07:28 am
We are four month's behind on our house loan. We applied for a loan modification and sent in the required documents a few weeks ago and yesterday we were pleased to see we were approved and telling us to pay the new payments and the amount and the dates for the trial payments. We were estatic because we do not want to lose our home. Last month I attempted to make a monthly payment to try to stave down how far behind we were but they refused to accept any payment unless it was the full amount owed which we had not yet collected only enough to pay 1 house payment. However today, we get a letter from their lawyer saying they are holding a hearing next month to request the court to allow them to foreclose on us and have set the sale date as well. We are totally confused as to why they are approving us if they are going to foreclose anyways. We are hoping that maybe the law firm has not received some notification that we were approved for the modification. Does anyone know what is going on?
Posted on: 17th Jul, 2010 06:55 pm
Hi Tina,

I guess the law firm had not received the notification regarding the approval of your loan modification. You need to contact the law firm and the lender and get the whole issue clarified. You may even request the law firm to withdraw the notification.
Posted on: 19th Jul, 2010 01:36 am
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