A mortgage loan modification also referred to as a workout or restructure plan permanently changes the terms of the original mortgage note. A loan modification may include decreasing the interest rate, re-amortizing the remaining balance, extending the term of the loan and even principal loan reduction.
Advantage of Loan Modification
One of the biggest advantages of loan modification over other foreclosure options is that the interest rate can be modified to lower your monthly payment.
Another advantage of mortgage loan modification is that it stops late payment reporting to the credit reporting agencies. It gives you a new start much like a refinance. You may qualify if you have recovered from a financial setback.
When requesting a loan modification you will be required to provide financial documentation along with a hardship letter stating the cause of your short-term financial difficulties. The hardship letter may include unexpected medical expenses or loss of income and also how those circumstances have now changed.
The first thing you want to do is to gather your financial information. Though loan modifications vary from lender to lender, there is some information similar to every loan modification:
- Recent Paystubs and/or Proof of Income from all Sources (If self-employed, Profit/Loss Statements)
- Recent Tax Return
- Recent Bank Statements, Savings and other Asset Information
- Financial Statements detailing your income and expenses
- Hardship Letter (See Tips for writing a hardship letter)
- Mortgage Statement
- Second Mortgage or Home Equity Loan/Line of Credit Information
- Proof of Homeowner’s Insurance, if not included in escrow account
- Property Tax Statement, if not included in escrow account
Your lender may ask you for additional information but at least you can begin to complete your loan modification package.
Assigned to a Negotiator
Most loan modifications are handled by the loss mitigation department. In some instances, where there has been a bankruptcy filed, the loan modification will be initially handled by the legal department. If you are having absolutely no luck with your negotiator, you may be able to speak with another department. Inquire as to whether your lender has a Home Preservation Office, or any other department that handles loan modifications. During your negotiations make sure you ask for a principal reduction. Most, if not all, lenders will tell you flat out they do not engage in principal reductions, ask anyway, they may offer a principal deferment instead.
Research your home's current value
It may be helpful to research the current value of your home when requesting a principal reduction as part of restructuring your loan. Zillow.com is a real estate website that will give you a free estimate of your home’s value. Electronicappraiser.com is a real estate website that will give you a more accurate appraisal for a fee.
Be patient and persistent
Many times lenders will have special departments that handle more complicated loan modifications or take over negotiations when communications break down between the customer and negotiator.
Normally a modification is handled by a general department such as a home retention department. It is unfortunate but negotiators do not always have the interest of the customer at hand. Sometimes they just want to clear their desks.
Sometimes the negotiator will tell you the “investor” is not doing loan modifications. In this case you may only be left with the choice of litigation. Some investors make money when a loan is current and others make money when a loan is in default. The latter type of investor has no incentive to engage in the loan modification process. If you encountering problems ask for another department.
Get outside help
Should you feel uncomfortable in negotiating a mortgage loan modification or you have not received adequate service from your mortgage company, the government offers from help to homeowners. Contact HUD.gov for assistance or a non-profit organization such as Hope Now or Naca.com.
You may have to hire an attorneys who specialize in predatory lending and Truth-in-Lending Act violations to get some traction with your mortgge company. Oftentimes, once an attorney is involved, investors miraculously find incentives to create affordable loan modification offers.
- Mortgage loan modification can reduce a mortgage payment, reduce interest rates, restructure loan terms and offer the homeowner some much needed financial relief and peace of mind.
- Many loan modifications are just repayment plans in disguise. Lenders almost always capitalize unpaid interest, fees and taxes. The loan is actually re-amortized. This means that for many consumers loan modifications actually increase their monthly mortgage payment.
- Few, if any, lenders actually do principal reduction, which would ultimately reduce the homeowners mortgage payment along with amount owed on the home. With home prices falling and no future projections on when or if they will rise again, homeowners are left with upside down mortgages. Homeowners owe more than the house is worth. Principal reductions along with lower interest rates would help remedy the issue of upside down mortgages.
Done fairly, loan modifications have the potential to provide economic relief and growth at the same. Affordable mortgage payments help consumers get their finances back on track and get people spending money again. It could be a win/win situation if lenders, banks and investors could get past their greed.
Remember, never take no for an answer. Be persistent, yet pleasant. Many, if not all, loan modification negotiators are overworked and running on little patience. Your concern is keeping your home and getting the loan restructured into something affordable and reasonable.