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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 Gray,

A loan modification would be a good option for you. This will help you make your payments affordable and help you be current on the mortgage. But in order to qualify for the modification, you need to convince the lender that you can afford to make the new payments under the modification plan. The fact that your job could disappear any time might be a problem in modification of the loan.

If you do not want to keep the property, a short sale is an option to consider seriously. This will hurt your credit (by almost 75-100 points), but not as much as a foreclosure does. However, you may have to pay the deficient amount arising out of the short sale.

Thanks,

Jerry
Posted on: 23rd Mar, 2009 07:23 am
My option ARM is about to be recast. The loan is primarily interest-only. I've been making payments on time and have no plans to walkaway. But my home value has dropped significantly – I mean it's upside down actually and I don't have the equity to help me refinance. At the same time, I don't think I can afford the 30 year amortized payments. What shall I do now? Is there any chance for a loan modification? Do I need to pay closing costs for modification?
Posted on: 24th Mar, 2009 03:57 am
Hi ralph,

In your situation a loan modification would be a good option. You need to send the lender a hardship letter stating your current situation and why a modification is necessary for you. You will also have to convince them that you can make the payments under the new payment plan. If the house is upside down, the lender can even allow a principal reduction. You will be requied to pay for certain costs, but this is usually much less than the closing costs during refinance.

Thanks,

Jerry
Posted on: 24th Mar, 2009 05:12 am
Hi there…thanks for this informative forum…It would be great if you could answer my query. I've just received a foreclosure notice from my lender. The letter says that I’ve 30 days to satisfy the loan. What does that mean? Do I've pay off in full? If I pay this, will I own my property free and clear? Or can another lien come up? By the way… My 2nd mortgage is the one doing the foreclosing, not the first.
Posted on: 28th Mar, 2009 03:47 am
Hi Guest

You will have to pay off the past due amount along with late fees and attorney fees. If your second lender is foreclosing the property, then he will have to satisfy the dues of the first lender. If he is unable to pay off your first lender, then he would not be able to foreclose your property.

I would suggest you to contact your second lender and check out the option of loan modification. In this process, the lender will give you an alternative repayment plan which will help you in paying off the mortgage dues. However, you should remember that it would be the lender's discretion whether he would accept your request for modification or not.

Thanks.
Posted on: 28th Mar, 2009 04:06 am
Can I get a loan modification without my husband's signture even though we're both on the mortgage
Posted on: 31st Mar, 2009 07:52 am
We only have 1 loan on the house
Posted on: 31st Mar, 2009 07:53 am
Hi shuwanda,

As both of you have your names on the mortgage, then I think the lender would require both of your signatures.
Posted on: 01st Apr, 2009 12:35 am
I have a ARM that will readjust May 2010 and a second both with IndyMac. I pay the interest only which is 3700.00. My house is very much underwater (California). I'm single and mostbof my paycheck goes to mortgage payment. I have not missed a payment and IndyMac will not help even after I sent a hardship letter. I was even told they don't care if the house goes in forclosure. What are my options
Posted on: 03rd Apr, 2009 04:09 am
Hi K3!

Welcome to forums!

In my opinion, the lender is not offering you any kind of help because you are current on your mortgage payments. The lender might be thinking that you are capable of paying the mortgage dues regularly. Lenders generally offer loan modification if borrowers are delinquent on their mortgage payments. Though you have written a hardship letter, may be it did not convince the lender. I would suggest you to contact your lender once again and explain your situation.

Sussane
Posted on: 05th Apr, 2009 08:52 pm
I able to pay my loan, but I'm concern that I will have to sell before my property reaches what I paid. I paid 273K, and it's now somewhere between 175K and 200K. My question is: If I were to sell at a loss will my bank make me pay the difference, even if that means I have to give them everything that I have in savings. This is not my current situation but it could be in a couple of years from now. Or how does one protect themselves so that they will have enough money to live on after selling at a loss. Thank you.
Posted on: 10th Apr, 2009 05:01 pm
Hi frederick,

If there is a deficient amount from the foreclosure sale of the property, then the lender may ask you to pay the deficient amount. If you do not want to pay the deficient amount, then you can inform your lender about your hardship and apply for a deed in lieu. If the lender accepts this request, then your property will be sold off but you will not be required to pay the deficient amount.

Thanks
Posted on: 10th Apr, 2009 09:17 pm
i thought modification was to make payment lower not higher. If payments are higher what would I be able to do to negitate lower payments once they have submitted a proposal?
Posted on: 13th Apr, 2009 02:51 pm
Hi tee,

In a loan modification, the payments can increase as the lender will add the past due payments while giving you the alternative payment plan. You can definitely negotiate for lowering the payments but it will be the discretion of the lender whether he would agree to it or not.
Posted on: 13th Apr, 2009 11:45 pm
Can a licensed mortgage corporation in the state of florida and or a licensed attorney in the state of florida accept partial upfront fees for loan modification services
Posted on: 14th Apr, 2009 12:33 pm
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