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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 michael,

it's not a good idea to pay upfront fees to the attorney for loan modification. i would rather suggest you to contact the loss mitigation department of the lender and discuss your options with them.
Posted on: 15th Apr, 2009 12:28 am
what if i filed chapter 13 bankruptcy 9 months ago. i still had to remain paying my mortage but i did not because a the time we filed bankruptcy my husband lost his job and we barely hasd any money left to pay the bankrutpcy and pay the mortage. can i file bankruptcy again?
Posted on: 23rd Apr, 2009 04:45 pm
I went to a company to get help with my mortgage, they put in papers for a remodification but told me to keep paying the mortgage, what happens if I stop paying until the remodification is approve, this is money that I can save in my pocket.
Posted on: 25th Apr, 2009 09:42 am

To Melissa,

You will have to wait for at least 2 years to file Chapter 13 bankruptcy again.

To eulaterry,

If you stop paying the dues until your remodification is approved, the past due payments will be added to the new plan that the lender will offer you. Thus, you'll have to pay an extra amount.
Posted on: 27th Apr, 2009 12:29 am
i have already filed chapter 7 bankruptcy and have applied for a loan modification with the lender as we are reaffirming the mortgage. now the lender says the loan modification is null and void since i filed bankruptcy. i am waiting for the mortgage lender as to how i'll pay off 3 months dues. since we're just 3 months behind, i hope to continue with the loan modification and repay the dues. so, what do i do now?
Posted on: 01st May, 2009 12:41 am
Hi Bob!

Welcome to forums!

As far as I know, you should sign the reaffirmation papers first and then apply for a loan modification. If you do not sign the reaffirmation papers, you will not be personally liable for the mortgage. Once you become personally liable for the mortgage, the lender will modify the loan.

Feel free to ask if you have further queries.

Posted on: 04th May, 2009 12:25 am
We refinanced our hom ein 2005 for what was supposed to be a 30 yr fixed rate, however this past July, it went to a ARM and payment increase of $300.00. We have asked Wilshire Credit for assistance with the payments since Nov 08, but was ititially denied, saying we had too much equity in thte home. How does that help with lowering my payment. In February we tried (and paid) for asistance from a 3rd party, but they did nothing for us. I have made contact with Wilshire on a weekly basis fo rthe past month and am being told they are putting a package together, but we have received nothing as of yet. I have been served with Lins Pending paperwork and now have final judgement date of 28 May. I have also been told I have a tentative foreclosure date of 08/03/09. What options do I have to keep my home after doing everything that has been asked. I am currently 4-5 months behind, (which Wilshire stated not ot make any payments) so I have triede to pay off other bills, but am still broke. Any suggestions in what to do to keep my home?
Posted on: 12th May, 2009 07:23 am
Hi jdgbc!

Welcome to forums!

As you are 4-5 months behind on your mortgage payments, there are chances that you will qualify for a loan modification. You will have to contact the lender continuously in order to know whether they will offer you a modification or not. As far as the Lis Pendens is concerned, you will have to contact an attorney and check out what steps you need to take.

Posted on: 13th May, 2009 10:18 pm
My husband and I currently have a mortgage with a local finance company. We owe approx. 54,000. We have never fallen more than a month behind on our payments. I inquired with the company about loan modification and they said that is not an option with them. They said they are not a bank. Can they refuse to work with us. Although we have never fallen 30 days behind, we are drowing in debt and are not sure how much longer we can keep this up. Because this is a mobile home, what other options might we have?
Posted on: 15th May, 2009 07:21 pm

Welcome to forums!

Finance companies may have their own rules. May be your finance company does not offer a loan modification to the borrowers. You can apply for a short sale if you are facing hardship in paying off the mortgage. However, if the lender agrees for a short sale, you will not be able to save the property. The property will be sold off to recover the dues. You will also be liable to pay the deficient amount resulting from the sale of the property. Moreover your credit score will be lowered by 75-100 points.

Feel free to ask if you have further queries.

Posted on: 15th May, 2009 09:47 pm
what if i don't have any tax information from last year? what do i do?
Posted on: 20th May, 2009 12:03 pm
You need to contact the tax department to get the correct information regarding your taxes.
Posted on: 20th May, 2009 09:56 pm
I am a military member & recently found out that the pres. stimulus plan will not cover me. I will be forced to move by the military in Oct 2009 and I don't know how I'll be able to pay rent and a mortgage. My home in Vegas has depreciated by $160,000 so I can't refinance. I am not behind on any payments. I have a 1st, 2nd and 3rd mortgage and have recently gone through a divorce. If I allow my home in vegas to be forclosed on, does that mean I automatically have to file for bankruptcy.
Posted on: 21st May, 2009 10:23 am
Hi Abbygirl!

Welcome to forums!

Foreclosure does not mean that you will have to file for bankruptcy. As you are not behind on payments, the lender will not immediately foreclose the property. However, once it forecloses, you will still be responsible for the mortgage payments of the 2nd and the 3rd mortgage. If you cannot pay them, the lender may send the account to collections.

Feel free to ask if you have further queries.

Posted on: 21st May, 2009 11:40 pm
My mortgage is held by the builder but service through a company called "NoteWorld" in Oregon - can I still apply for a modification ??
Posted on: 24th May, 2009 08:16 pm
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