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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
yes i did do a hardship letter. And the lender had told my attorney that i have been pre-approve for the load modification. And that i am being reviewed. but for some reason the lender still wants to put me in foreclosure. all i want is a lower monthly payment. I have been paying for 9 years very very good and its about time i get a lower monthly payment cause of all the bills that are going up. what should i do?
Posted on: 13th Mar, 2009 03:46 pm
I think that your lender has not approved the loan modification for some reason and thus he wants to foreclose the property. I would suggest you to speak to the lender and try to convince him about a loan modification. If the lender is not convinced, then I don't think you have much to do.
Posted on: 13th Mar, 2009 09:45 pm
Will a Loan Modification affect my credit score in a negative way like a foreclosure does?
Posted on: 13th Mar, 2009 10:56 pm
Hi keisha,

A loan modification will not affect your credit score. In this process, the lender will provide you with an alternative payment plan which will help you in paying the mortgage debts. However, you should remember that while modifying the loan, the lender will add your past due payments to your new payment plan which may increase your monthly payments.

Take Care.
Posted on: 14th Mar, 2009 01:24 am
I am looking into this loan modification... anyone know of a good reputable company that can help me with this? I have tried to deal with Countrywide directly, but they just keep giving me the run around.
Posted on: 16th Mar, 2009 10:18 pm
hi liz,

it is your lender who will modify the loan for you. in order to get a loan modification, you will have to write a hardship letter to your lender. if the lender is convinced by your hardship, then the loss mitigation department of the lender will modify the loan and give you an alternative payment plan. this will help you in paying the debts.

take care
Posted on: 17th Mar, 2009 02:00 am
I have called Countrywide many times and they are just not willing to work with me. They have me tied to an adjustable interest only loan and because I am still making my payments (to save my credit) they aren't willing to modify. I tried to refi, but with the economy, my house doesn't appraise high enough. I just don't know what else to do. I have good credit, I pay all my bills on time, but no one will help me get a fixed loan.
Posted on: 18th Mar, 2009 03:59 pm
Hi Liz!

Welcome back to forums!

The lender will not modify the loan as you are still current on your payments. Lenders agree to modify the loan only if you are delinquent on your payments. It will also depend upon your financial situation.

Posted on: 18th Mar, 2009 09:04 pm
Can a mortgage lender foreclose on a home while a request for a loan modifcation has been sent to them?
Posted on: 19th Mar, 2009 01:36 pm
Does anyone know what the tax deduction rules are for claiming the fee charged by mortgage companies for loan modifications? I paid a fee to the bank to close the loan modification so I am curious to find out how this qualifies if at all. If so, how do they calculate the deduction. On your federal taxes, the section on deductions asks for "points" on refinancing an exisitng mortage. Is a loan modification considered a refinancing? How do you calculate the deduction, I didn't see any points on when signing the closing statements, i rememer only the term, "closing fee/cost"....

Any ideas?

Posted on: 19th Mar, 2009 04:14 pm
Countrywide told us that they cannot offer us any kind of assistance. We are 6 months behind in our mortgage payments and are trying to work something out with them. Do you have any suggestions? Should we go through one of the many companies that have been contacting us to help?
Posted on: 19th Mar, 2009 06:54 pm
Hi Millie,

If you have sent them a loan modification request, they cannot foreclose on your property. But they can do so, in case your request is rejected by them.
Posted on: 20th Mar, 2009 06:31 am
hi sfloridaflyer,

i'm not aware of any such tax deduction for the fees paid to the lender for modification of the loan. the point is a certain percentage of the loan that you pay the lender as closing fees. refinance and loan modifications are two different things. i think you should consult a tax consultant in this regard.
Posted on: 20th Mar, 2009 06:48 am
Hi BA,

Have you send them a hardship letter regarding this? This is the first thing you should do. however, if they are still reluctant to work out a plan with you, you can contact a loss mitigation expert or a lawyer. They can help you better.
Posted on: 20th Mar, 2009 06:53 am
I am almost ok with my income and house payments, but quite upside down on the value. When I hear about the new programs I wonder what I might be able to do with a Loan Modification or Short Sale or whatever. My job could disappear at any time. I am in California, and I'd like to start over from zero. I do not want to wait, I at least want to understand my options & maybe more. My lender must be happy to have me, for now. I know regulations have dramatically changed, how can I get "fresh" advice and review all my options?
Posted on: 20th Mar, 2009 11:19 am
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