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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 williammccune,

You will have to inform the lender about your financial hardship and medical problems. You will have to convince the lender so that he will consider your case, modify the loan further and stop the foreclosure.
Posted on: 04th Aug, 2011 12:11 am
I was able to obtain the home affordable modification & it has dropped the monthly payment considerably. However, I obtained this due to the fact that my monthly income had lowered. Would it hinder me to try to pay a little extra toward the principal or might they think I am making more $ and up the monthly mod pmt?
Posted on: 10th Aug, 2011 07:25 am
Hi Guest,

You can try paying a little extra toward your principal amount. In order to do so, I will suggest you to have a word with your lender and take his opinion in this matter. The lender will let you know whether or not you can make the extra payments in this situation.
Posted on: 10th Aug, 2011 11:17 pm
is it possible to refinance to a lower mortgage rate after a modification?
Posted on: 22nd Aug, 2011 08:55 am
Hi mda!

Welcome to forums!

After a loan modification, if you've paid off your debts as per the repayment plan and build up some equity in your property, then you may be able to refinance the loan.

Feel free to ask if you've further queries.

Sussane
Posted on: 22nd Aug, 2011 10:23 pm
lm 27 months past due can i get help
Posted on: 24th Sep, 2011 09:54 pm
hi sam,

you can contact your lender immediately and apply for a loan modification. the lender will look into the overall situation and let you know whether or not your request will be accepted. in case your request is not accepted, it will be better if you could get rid of the property. you can apply for a deed in lieu of foreclosure in order to get rid of the property.

thanks
Posted on: 25th Sep, 2011 11:37 pm
Sam,

I'm surprised you have not been foreclosed on yet. I doubt there may be much help available there.

Regards,

Jeffrey Ragan
Posted on: 04th Oct, 2011 10:05 am
If my monthly mortgage payment is late but I neglect to pay the late fee - just the regular mortgage amount, can the lender add those fees to the principal?
Posted on: 08th Oct, 2011 12:43 pm
Hi Louis,

The lender may add those late fees to your principal amount. In many cases, the lender may not accept your mortgage amount without the late fees.

Thanks
Posted on: 09th Oct, 2011 08:43 pm
I am trying to get a loan modification on my home. It was worth 1.5 million before the crash. An appraiser came out last week but they won't give the value to me until the bank (who paid for the appraiser) decides whether or not to modify my loan. I am sure that the value has dropped (no home or property has sold in my area for 2 years!). Does the bank HAVE TO modify my loan because of the drop in value?
Posted on: 14th Oct, 2011 11:32 am
Welcome Leah,

It is not mandatory for the bank to modify your loan even if the property value has reduced. However, if you can successfully negotiate with them, then you will be able to qualify for a loan modification.
Posted on: 16th Oct, 2011 10:37 pm
You may find a tough time getting a loan from financial institutions with poor credit.Either downscale your plans and amount or wait until the absolute specialist help you out...
Posted on: 19th Oct, 2011 11:01 pm
I was involved in a car accident back in 2009 and unfortunately I fell behind in my mortgage. I contacted my lender and advised them I was going through a ruff batch ... the representative advised me that I should apply for the "make affordable housing plan." in september 10 I had to let the mortgage go for the third month in order to qualify for the plan.. I then sent all the necessary information required to process the program, after sometime I contacted PNC and they advised me that the procedure and/or information share was beyond the 90 period. Thus making my information sent expired and that I should resend all iformation, again... This went on til July of 11.. I returned back to work at full capacity and/or well enough to return to the workplace after a surgery that took place in April of 11, Only to find that because I manage to work some overtime I was not eligible for any programs and that If I wished to retain the property I would have to pay back all the past due months (17 months) translation, my mortgage has doubled and remain as such til I pay back some 42,000 dollars, taking into consideration all late fees and interest.... The actual uunpaid is approximately 19,000 dollars!!!!! IS this criminal behavior? and if so, please someone help me !!!!
Posted on: 21st Nov, 2011 01:50 pm
I was involved in a car accident back in 2009 and unfortunately I fell behind in my mortgage. I contacted my lender and advised them I was going through a ruff batch ... the representative advised me that I should apply for the "make affordable housing plan." in september 10 I had to let the mortgage go for the third month in order to qualify for the plan.. I then sent all the necessary information required to process the program, after sometime I contacted PNC and they advised me that the procedure and/or information share was beyond the 90 period. Thus making my information sent expired and that I should resend all iformation, again... This went on til July of 11.. I returned back to work at full capacity and/or well enough to return to the workplace after a surgery that took place in April of 11, Only to find that because I manage to work some overtime I was not eligible for any programs and that If I wished to retain the property I would have to pay back all the past due months (17 months) translation, my mortgage has doubled and remain as such til I pay back some 42,000 dollars, taking into consideration all late fees and interest.... The actual uunpaid is approximately 19,000 dollars!!!!! IS this criminal behavior? and if so, please someone help me !!!!
Posted on: 21st Nov, 2011 01:59 pm
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