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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 Guest!

Welcome to forums!

The lender has the rights to claim all the delinquent dues from you along with the added fees and other charges. There is nothing criminal in this. If you're unable to pay off the dues, it's better to negotiate with them and get to know whether or not they will give you an affordable payment plan to pay off the debts.

Feel free to ask if you've further queries.

Sussane
Posted on: 21st Nov, 2011 08:30 pm
I am currently under a chapter 13 because I did not want to lose my home. I tried to modify my loan about 2 years ago, and Bank of America did a number on us. Under making home affordable, am I able to refinance or streamline my current loan even though I am under chapter 13?
Posted on: 12th Feb, 2012 02:55 pm
Posted on: 12th Feb, 2012 11:15 pm
Pleas help us find a phone number so we can discuss our loan, we were with Taylor, Bean and Whitaker when it was taken over by Cenlar, we have never received any information from Cenlar.
Posted on: 28th Mar, 2012 05:40 pm
Hi William,

You can find the contact details of Cenlar from the given page: "http://www.cenlar.com/contact-form.asp"

I hope this will help you in getting the required contact details.

Thanks
Posted on: 28th Mar, 2012 11:00 pm
Hi ..Jessica...What is a Loan Origination Process and what are the various loan origination channels for applying a U.S Residential Mortgage Loan ? I have heard that in a loan origination process, borrower can apply for loan using various channels of loan origination process. Please give an idea of various channels used and various "Role Players" for each channels ( Like lender ,broker etc) Also help me with various benefits and disadvantages for each channel of loan origination process.. Thank so much for your help..
Posted on: 06th Apr, 2012 06:19 am
Hi PM,

Your query has been replied to in the given page:
http://www.mortgagefit.com/Mortgage-Basics/What-is-Loan-Origination-Process-and-what-are-the-various-loan-origination-channels-for-US-Residential-Mortgage-Loan.html

Take a look at it. I hope it will help you.
Posted on: 06th Apr, 2012 10:53 pm
Due to some medical issues, my husband and I have decided to file bankruptcy. We have owned our home since 2006. Through the process of the Bankruptcy, we have found out that our property value has decreased by $18,000 to $23,000. So we are "Underwater" on our mortgage. Our Attorney advises us to let the house go back to the lender in our Chap 7 and not look back. But we are reluctant to do that. We have attempted 3 times to have our loan modified over the last year and a half only to be told "NO" all three times due to never being late on our payments. We have wanted to modification due to being in an Adjustable Rate Mortgage which adjusts every 6 months. And even though the prime interest rates are going down, Bank Of America keeps jacking our payments up. Has anyone out there reaffirmed their Home Mortgage during a Bankruptcy and then successfully gotten a Modification after the Bankruptcy was over?
Posted on: 29th May, 2012 01:49 pm
hi redbird,

home mortgage reaffirmation is a common thing in case of chapter 7 bankruptcy filing. you may get a modification after you reaffirm the loan as it will make you personally liable for the mortgage payments.
Posted on: 30th May, 2012 01:05 am
we would like to sell a portion of our property to our children,it still has a 1st & 2nd mortgage
Posted on: 20th Jul, 2012 08:20 am
hi sukimlynn,

if the property is sold off, then the lender may want the new owners to refinance the mortgage. if your children are ready to do that, then i don't think you may face much problems.

thanks
Posted on: 23rd Jul, 2012 01:03 am
i bought the house with my friend he is in the loan with indimac,im in the deed like joint tennant, last year he made, quit claim, i tried to do loan modification, but it was denied,because he does no live n the property,i was like contribuitor,,i called to a lawyer and the legal assistatn said i qualified for loan modification,and i have to make a letter to specified that my friend no lived in the house i im living in the property i want to know if can i do modification thx
Posted on: 27th Jul, 2012 05:33 pm
Welcome giovanna,

You can re-apply for a loan modification once again with your lender. The lender will again check your request and let you know whether or not you will be able to qualify for it.
Posted on: 27th Jul, 2012 09:50 pm
We had sent in information for our loan modification and got a letter stating they would hold off foreclosure, however, we had Freddie Mac realtor come to the door saying that the house was foreclosed on already. We feel blindsided because we sent in everything without opportunity for a modification review. What recourse do we have. We are in VA
Posted on: 16th Sep, 2012 06:50 am
Hi Frazzled,

If you have already applied for a loan modification, then the lender cannot foreclose the property. I will suggest you to take help of an attorney in this regard.

Thanks
Posted on: 17th Sep, 2012 12:31 am
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