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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
my x-wife and i has been divorce over 8 years. she had her own home before we got marry and i moved in after we were married. we both got a second mortgage together on her home. well after we got the divorce she told me that she would take my name off the mortgage by refiancing the loan. i recently got marry again to a wonderful person and when we went to purchase a home we found out that my x did not refinance and still has my name on the mortgage. i also found out that she did a modification loan and got behind on her payments which cause to damage my credit. i have not live there over 8 years since the divorce. what can i do to solve this problem?
Posted on: 08th Feb, 2011 02:03 pm
Hi billy,

Unless your ex refinances the loan or assumes it, you won't be able to get a new mortgage in your name. The late payments on that mortgage will have a negative affect on your credit scores.

Posted on: 08th Feb, 2011 10:46 pm
Is it legal to modify a loan, without asking the second title holder? My fiance got a letter with a notice of his house being in forclosure. His Exwife claimes she's getting the loan modified...but how can this be when.
He is on the deed of trust? How is it possible for her to modify the loan without his permission? What are the regulations for those issues in the State of Colorado?

Thank you in advance
Posted on: 06th Mar, 2011 07:28 am
Welcome michaelastubbs,

Both the lenders should be consulted before going for loan modification. However, if the loan was in the name of the ex-wife alone, then she can get a loan modification solely in her name.
Posted on: 06th Mar, 2011 10:31 pm
we have just been given a three month hamp loan modification due to start april first. we got it our selves after two loan modification companies were unsuccessful, one we already paid to do a rest report. any way we called both back and they reviewed indymac"s 20 page contract and said it was really good but be sure to do the payments exactly as described but not to pay march's payment. they said it will screw up the trial postings but didn't explain. we are nervous about this and here's why. we never defaulted to begin with. my spouse lost their job for 4 months last spring. they offered us a three month decreased payment "to help us over the hump" and we signed the contract. we asked for loan mod and they jerked around since last year. in jan we found a note from a realtor asking to sell our foreclosed home!! oh and after the three month trial they helped us by putting our payments up to full amount ( a $1000 more a month). after paying $300 for a report from a loan mod firm, the bank finally answered our questions as to how they were posting what we thought since last year were our regular on time payments. they are going to the false default arrears and fines!!! we think we shouldn't have an actual missed payment but they're not posting as them anyway despite our filed complaint to the bank and occ and others. no one has responded to it. what is the chance that if do not pay march, that they will post the first trial payment for march and it will look like we failed the trial. the loss mitigation department will nit respond to the questions about this nor can we get the guy working our file to talk to us on the phone suddenly.
Posted on: 10th Mar, 2011 06:14 pm
Your query has been replied to in the given page:

Take a look at it. I hope it will help you.
Posted on: 11th Mar, 2011 01:51 am
The number of home loan packages has risen since last month. Most of the new applications are for mortgage refinancing. Low rates of interest make adjustments more attractive than purchases. Prospective home buyers are still cautious, as house values are continuing to decline and few want to purchase an asset that is in the midst of depreciating.

[Link Removed as per forum rules. Thanks]
Posted on: 14th Mar, 2011 10:54 pm
Welcome SammiC,

You're correct. Most of the consumers are interested in refinancing their existing high interest loans into low interest ones. This makes it easier for them to pay off their loans and own the property free and clear.
Posted on: 16th Mar, 2011 11:31 pm
in order to be approved for a modification, how much money should i have left after my mortgage payment, and expenses. i want to be approved and i will lower, or cut out expenses if i have to. i just need a figure to know before i give my financials.
Posted on: 08th Apr, 2011 09:52 am
Hi andrea,

It will depend upon the income that you have. The lender will send you a financial package which you need to fill out. The lender will judge your financial situation and let you know whether or not he will consider your request. It will be important for you to show some kind of income in order to get qualified for a loan modification.
Posted on: 08th Apr, 2011 10:12 pm
Lenders monthly payment offer i higher
than the actual monthly payment.
Posted on: 26th Apr, 2011 01:41 pm
Hi jose,

If you're delinquent on your monthly payments, then the lender may add that payments to your principal balance which may increase your monthly payments though you go for loan modification. You can request the lender for a principal reduction in such a situation. It will be the lender's discretion whether or not he will offer it to you.

Posted on: 28th Apr, 2011 12:59 am
Need help saving home bank will not take payment 3 months behind . Ihad modfi year half ago. Need help illness been problem keeping up with pay ments that went up after mortified please help. Bill
Posted on: 02nd Aug, 2011 11:46 am
Need help saving home bank will not take payment 3 months behind . Ihad modfi year half ago. Need help illness been problem keeping up with pay ments that went up after mortified please help. Bill
Posted on: 02nd Aug, 2011 11:54 am
Need help saving home bank will not take payment 3 months behind . Ihad modfi year half ago. Need help illness been problem keeping up with pay ments that went up after mortified please help. Bill
Posted on: 02nd Aug, 2011 11:55 am
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