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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 my opinion you will be able to modify the loan. You'll have to speak to both the builder as well as the servicer.
Posted on: 25th May, 2009 12:43 am
I have been layed off from my job..and also have had my arm max out..and now the new payments are out of the question..so we are falling further and further behind...but no foreclosure yet...We have tried to work with the company for a modification but, very very difficult...really nice people however, from a different country and there is sometimes a language problem...also they have offered several things but just extending the arm out another five years...I'll be on fixed income then..so would have similar if not worse problems..each time we seem to get close, they ask for more information or time goes by and they need a whole new package...Its as if they are going through the motions but really don't want to do anything. Always a different person each time we contact them, etc...Is there assistance out there at low cost or free to help negotiate with the lender...We want to keep our home and feel very strongly that if the payments were reduced from their 9.75 interest rate, and extended out to a fixed mortgage...We could afford to stay in our home now, and in the far future on fixed income...thank you..
Posted on: 28th May, 2009 10:43 am
you can contact a loss mitigation expert and discuss your case with him. he can then negotiate with your lender and help you in modifying the loan.
Posted on: 28th May, 2009 10:57 pm
Can I foreclose on a home that I own if I'm not in financial hardship?
Posted on: 29th May, 2009 09:45 pm
Hi anonymous,

If you are not making the payments, then the lender would automatically foreclose the property. However, if there is no financial hardship, why do you want the property to go into foreclosure? It will lower your credit score by 250 points.

Thanks
Posted on: 31st May, 2009 10:33 pm
I have a broker working on a loan modification for my home. I paid 50% of the cost for this process. The modification is no where near any agreement, and the broker is asking for the other 50% to pay in full. Is it a standard procedure to pay in full for service not guaranteed? Is there a law?
Posted on: 01st Jun, 2009 11:18 pm
Hi spagui,

I don't think your lender can demand money from your before he has guaranteed the service to you. You should consult an attorney and take the needful steps.
Posted on: 03rd Jun, 2009 12:02 am
After 5 months of unemployment, our income has been reduced by 50%. This makes our payment (which is an ARM) about half of our monthly income. Even though we kept up with the payments, does this makes us a likely candidate for modification? I have some reservations about the cost associated--I know mortgage companies don't do this for free. My goal is to lower our payments and possibly change to a fixed rate but it seems too easy. Is it too good to be true?
Posted on: 03rd Jun, 2009 06:41 am
Hi bandrs,

Accepting a loan modification or rejecting it is the discretion of the lender. You can write a hardship letter to the lender and inform him about your financial situation. The lender will judge your situation and then decide whether he would give you a loan modification or not.

Thanks
Posted on: 03rd Jun, 2009 11:43 pm
Who said you have to be late on your Mortgage to qualify for a Loan Modification? Or for lender to accept a Loan Modification Application. I though it doesn't matter if you late on your payments or not. Isn't the HardShip what counts. I thing I read this some where in the internet. Please clarified.

Thanks,
Tanya :?:
Posted on: 05th Jun, 2009 03:49 pm
I have a ?. If I am in the process of a Loan Modification. Meaning that I already sent all required documents and just waiting for results. If I am unable to keep paying my mortgage payments. Can the lender report to Credit Bureau of not receiving my mortgage payments. Doesn't being in the process of a Loan Modification stop lender from reporting missing mortgage payments to Credit Bureau?

Thank you,
Tanya
Posted on: 05th Jun, 2009 06:26 pm
Hi Nunez,

Lenders generally accept a loan modification when you are delinquent on your mortgage payments. However, in certain cases, the lender would accept you request when you are current on the payments.

The lender can definitely report the late payments to the credit bureau though you've applied for a loan modification. Applying for modification of loan will not stop the lender from reporting the missed payments.

Thanks
Posted on: 05th Jun, 2009 09:32 pm
if you refinance your home with your spouse and pay it off. does refinancing over ride warranty deed that had another person on it but deceased.
Posted on: 15th Jun, 2009 07:30 pm
http;//homeloanmodification.dyndns.org says that may people get decliend trying yo get a loan mod because they do notknow how to submit their loan workout application correctly. They claim that you would be better served by having an attorney represent you in the negotiations. That sounds like sound advice to me, is that correct?
Posted on: 16th Jun, 2009 12:59 am
Hi

To Nora,

Generally, when you refinance the mortgage in your name, the lender would want you to have the deed to the property in your name. Thus, if there is a decease person on the property deed and you refinance it in your name, the lender would like you to get the title in your name first and then apply for the refinance. But is it possible for you to explain the situation in detail? It'll help me understand the situation better and offer my suggestions on the issue.

To Jimbo,

It's true that your loan modification application, financial statement and other documents that you submit with the lender play an important part in getting your application for a loan modification approved. It is very important to convince the lender that you are indeed in serious financial problems and a modification would do you a world of good in getting current on your payments. Getting the help of an attorney or a loan modification expert while negotiating with the lender to modify your loan, will no doubt be a better option for you. It is indeed a sound advice to have an attorney or a modification expert to represent you in negotiations.
Posted on: 16th Jun, 2009 06:17 am
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