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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
Welcome SHAYshay,

If you don't have a job, then there are less chances that you will get approved for a loan modification. If you're approved for modification, it will help you in staying in the property if you're paying off the modified dues on time.
Posted on: 08th Dec, 2010 10:53 pm
I have a balloon payment due (in full) in a year, my condo has been for sale on and off for the last 3 years ( this last time it has been listed since July) with no offers. I have dropped the price below even what I will owe the bank. I contacted a lawyer who is telling me to file for chapter 7 - because of the balloon and credit card debt I have. I have a good credit score (713) and I am not late on any payments. I have tried to get my condo refinanced, but no one will help me. The last place that sold in here was a short sale at 35,000 below what mine is listed at. What would have the smallest impact on my credit score if I can not sell in the next year? he thinks I should file for chapter 7 now... even though I pay everything on time.
Posted on: 12th Dec, 2010 05:20 pm
Wells Fargo wants to tranfer us to MERS for a loan modification saying we have to give them power of attorney. Not really seeming to give us a choice. Is MERS now legit?
Posted on: 14th Dec, 2010 07:20 am
Hi markdavidgustafson,

Your query has been replied to in the given page:

Take a look at it. Hope it helps you.

Posted on: 14th Dec, 2010 08:40 pm
My ex-wife and I have been divorced for 5 years. We had a home mortgage together which she assumed in the divorce and was supposed to get it refinanced in her name but couldn't do it in her name only and couldn't find anyone to co-sign for her. I filed bankruptcy and included this mortgage in my bankruptcy which was discharged a couple of months ago and I am no longer responsible for her mortgage. My ex has now applied for a loan modification and they also want me to sign the papers for the modification also. If I sign these papers, does it make me responsible for this loan again. From what I am reading, it is basically like refinancing. Any help would be greatly appreciated! Thank you!!!!
Posted on: 20th Dec, 2010 07:04 am
I would like to know during modification loan process, do i have to pay my monthly payment? how much i should pay?
Posted on: 20th Dec, 2010 08:47 am

Welcome to forums!

To PBurress,

As the mortgage has been discharged in your bankruptcy filing, the lender cannot make you responsible for the loan though you sign the loan modification papers. However, I will suggest you to contact your bankruptcy attorney and check out what you should do in this regard.

To xiyuan,

You won't have to pay the loan when the lender is considering your loan modification. However, you can contact your lender and check out if he will accept your payments during the loan modification process.

Feel free to ask if you've further queries.

Posted on: 20th Dec, 2010 08:27 pm
I have recently applied for a loan modification at Bank of America. Instead of lowering my mortgage, they increase my monthly mortgage by $ 600.00. They said that they need an escrow for property taxes and insurance. I have been paying my taxes and insurance to date. What's the point of having a loan modification it will increase your monthly payment?
Posted on: 23rd Jan, 2011 09:42 am
Hi nalugi,

A loan modification can increase your payments. The delinquent balance gets added to the mortgage and the lender will give you a payment plan based on the whole mortgage amount.

Posted on: 23rd Jan, 2011 11:10 pm
Posted on: 25th Jan, 2011 12:02 pm
Hi Tina,

Unless your loan modification request gets rejected, the lender won't be able to foreclose the property.
Posted on: 25th Jan, 2011 09:16 pm
If you're having trouble meeting up with your current mortgage payment, you are eligible for a loan modification wherein the lender restructures the rate and terms of your loan down to an amount that is affordable and sustainable over the long term. To qualify, however, you need to prove that you have enough income to make the reduced payments on an ongoing basis.
Posted on: 27th Jan, 2011 09:58 am
The following advices can be a real help to keep your mortgage away from being foreclosed.
Posted on: 30th Jan, 2011 09:52 pm
The bank denied our loan modification request... they said we do not earn enough income to qualify.

Is there any steps that we can take to stay in our home?.. we are around 75 days late on the mortgage.
Posted on: 07th Feb, 2011 01:11 pm
Hi Razorback!

Welcome to forums!

You will have to convince the lender for loan modification. If you cannot convince the lender for it, then he will foreclose the property and you will lose it.

Feel free to ask if you've further queries.

Posted on: 07th Feb, 2011 10:24 pm
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