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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
In 2007 my income was 14,000 then I changed jobs and in 2008 it was $120,000 net, I also becme self employed that year, will my mortgage holder look at the past two years for consideration of a loan modification? I has many personal loans from family that were paid back in 2008 and im behind by 6 months in payments now,
Posted on: 28th Feb, 2009 08:58 pm
Welcome NoCo,

The lender will definitely check your financial situation before approving a loan modification. If you can prove that you are presently facing a hardship due to which you are unable to pay the dues, then he may approve the modification.
Posted on: 01st Mar, 2009 11:01 pm
i've been in talks with a negotiator in arkansas. they said i could stop paying a $200,000 mortgage as i'm upside down and i've recently filed bankruptcy too. well the mortgage is an option arm …just ask me what it is…and i'll tell you guys i was just ripped off by my lender who said it was an excellent product and had very low rates..who knew the rates would just go up like anything and bring havoc in my life..anyway, so this negotiator now asks me to stop making min payments on the arm so that they could negotiate for a loan modification. i also got in touch with the lender's loss mitigation department and we're to meet next week. they want me to show them all my income docs, letters i've send them and a whole lot of stuff… the dept knows i've filed ch7 but they didn't seem to react to the fact that i need to stop payment. do i really need to be current or can i just stop paying?does that help in any way??
Posted on: 05th Mar, 2009 02:37 am
My loan is $395,000 at 5.35% 30 years fixed.We are retired and our main income is my and my wife's also.We do have some money invested in our 401k. In order to pay our mortgage we are selling some of our 401 money. Do you think that we can qualifie for modification mortgage? Thanks
Posted on: 06th Mar, 2009 03:58 pm
Posted on: 07th Mar, 2009 03:10 pm

To garry,

Lenders do not approve a loan modification unless you are delinquent on your mortgage payments. So if you are current, there are chances that the loss mitigation department will not consider your request.

To Andreas,

You can speak to the lender and inform him about your hardship through a hardship letter. The lender will check out your financial situation and decide if you would get a loan modification or not.

To nick,

I don't think your loan can again get modified by the lender so soon. Your monthly payments are higher because the lender had added the past due payments with your existing monthly payments.
Posted on: 08th Mar, 2009 11:23 pm
Why is it you given so much erronious information, and told how easy something is, after the fact has been stated it doesn't matter what your current situation, there is a plan for you, you give all your personal information out then told if you could show that you have another income that would help and we could began the process then once you give the other source of income, then you hit another stumbling block and all of sudden what looked like a very good deal turns out to be the company, lenders next words to you oh I 'm sorry that can't work, can you explain that I mean even if that person has other obligations it doesn't take up the other persons entire income that's how you're making it, and then to have what is suppose to be a Loan expert tell you I'm sorry we can't help you!!! it's like give me all your personal information and even if I say that we can help, you give additional information (personal) and then to be told sorry, we can't help you now (it's like you see that there's going to be difficulty and you're trying to get assistance but no one will help unless you're in desparate need is that the case, you're so in need of help, that the company is hoping you'll fall for any dumb deal they try to stick you with? is that the case, and then after 2 or 3 years you're in the same parculiar dumb situation that you were facing at first (up the river without a paddle sort-of-speak).
Posted on: 09th Mar, 2009 10:39 am
Whether it's a loan modification, short sale or a deed in lieu, you will have to give certain personal information to the lender. Moreover the lender will also wish to know your financial situation. Unless you disclose these to your lender, he will not be able to judge your situation. If you cannot convince him about your hardship, the lender will not accept your request.
Posted on: 09th Mar, 2009 11:55 pm
Can your mortgage loan be modified if payments have fallen 4 months
behind due to a job loss and there is no current job
Posted on: 10th Mar, 2009 01:57 pm
I currently owe $262k on a home worth around $520k. I also have two equity lines worth an additional $240k, making my total balance due between the 3 $502k. I've never been late on any of the mortgage/equity payments but they are putting me in a position where I will probably be late and am forced to use credit cards / equity lines to pay for my a portion of my monthly living expenses.

How successful can I be in getting the equity lines (both through banks) or the mortgage lender (Wells Fargo) in decreasing the principal balances so that I can roll it all together and better afford the monthly amount.

Also, what are my chances of offering a settlement amount of 50% or so to the banks holding the equity lines? At this rate I'll never pay them off and it may lead me to foreclosure / bankruptcy.
Posted on: 11th Mar, 2009 02:07 pm

To zahia,

Yes, you can speak to the lender and submit a hardship letter in order to check if you qualify for a loan modification.

To stevefrye,

I doubt whether your lenders would consider your request for principle balance reduction. As far as I know, most lenders do not accept this. As far as offering a settlement amount of 50% or so is concerned, you will have to negotiate with the lender. However, it would be the lender's discretion whether he would accept it or not.
Posted on: 11th Mar, 2009 11:55 pm
The mortgage is in my wifes nae and she set up a loan modification due to u not being able to pay the existing mortgage. They did not change the rate and made the payments higher as well as keeping it arm. I'm contributing fianacially to this loan but my name is not on it. what should we do
Posted on: 12th Mar, 2009 02:09 am
i got my own attorney to do the loan modification and i havent payed for about 4 months. I started the loan modification since Dec. of 2008. Now the lender is telling me that i am going to be in foreclosure. The attorney that i have is telling me that the lender hasnt found a nagotiator yet and that there 60 days late. Can i still be going into foreclosure?
Posted on: 12th Mar, 2009 10:40 am

to gabby,

in a loan modification, the monthly payments can increase because the lender adds the past due payments to the monthly payments while giving you a new plan. as your name is not on the mortgage, you are not liable to pay the debts. moreover, your credit will not get hurt if the property is foreclosed upon. if you want you can try and refinance the mortgage and add your name to it.

to sina,

did you write a hardship letter to the lender and applied for a loan modification? if yes, then the lender should have informed you whether they are accepting your request or not. your attorney will not modify the loan. it is lender's discretion whether he would go for it or not. yes, your property can go into foreclosure.
Posted on: 13th Mar, 2009 01:16 am
I have seen so many people hurt from doing loan modifications without legal help. I have found a company that do what they say and if they dont they will give you your money back. For me that is good news. They did lie to me or over charge me. Check them. Contact William@949-429-0176
Posted on: 13th Mar, 2009 02:48 pm
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