Successful Steps to Getting a Mortgage Loan Modification

by Simon Lindsay on Mortgage

Mortgage Loan and glasses

Many Americans today cannot make their monthly mortgage payments. Additionally, for millions of Americans – approximately 11 million as of 2011 – owing more on their home than it is currently worth is a sad reality. This situation is especially bad considering median home prices are only expected to decrease over the next 6-12 months in most forecasts.

Short of prices suddenly reversing themselves, underwater homeowners do not have many options left open – nor do people who, for whatever reason, cannot make their current monthly payments. Fortunately, there is usually the option of a loan modification that is at least a possibility – particularly with federal modification programs either in play now or in the works.

Here we will discuss how you can increase the odds of successfully negotiating a loan modification for your home.

What is a Mortgage Loan Modification?

First, an explanation is in order. A mortgage loan modification is an agreement between you and the lender in which the lender agrees to modify the terms of your mortgage contract to help you continue to stay in the home and pay off the loan. They do this because they would rather have a steady source of income – your monthly payments – than face the cost and hassle of repossessing the home and selling it on the market.

Now, a lender is by no means required to carry out a loan modification. Even under the strictest federal programs, such as those involving HUD, Fannie Mae, and Freddie Mac, loan modifications are not mandatory; a lender simply has to make them available.

What are the Benefits?

The primary benefit of a loan modification is to make living in your home and paying payments more affordable. It will usually accomplish one or more of the following:

– A lower interest rate, which results in lower monthly payments;

– A longer loan term, which also results in lower monthly payments;

– Principal reduction, which reduces outright the amount of principal you owe

Of the three, the third option is the rarest. But, all things considered, hitting on at least one of the above benefits is very possible (and given the number of foreclosures lately, pretty likely).

How Do I Apply?

There are two ways to apply for a loan modification. The first is to ask your lender, typically represented by your loan officer. Banks have procedures to follow and paperwork to fill out, so opening up a line of communication is often the first step.

You can also turn to the federal government. If you have an FHA loan, you can participate in a FHA Short Refinance, designed to help people who owe more than their homes are worth but are not behind on their payments currently. The Department of Veterans Affairs also gives you opportunities to participate in a loan modification program, if the lender agrees. Most of these programs were made possible through the Home Affordable Modification Program (HAMP).

For VA loans, call 877-827-3702 or visit http://homeloans.va.gov. For FHA loans, call 877-622-8525 or visit http://hud.gov/offices/hsg/sfh/nsc/nschome.cfm.

Ways to Increase Your Chances of Success

Once you know what a loan modification can do for you, and you want to apply, you can take certain steps to increase your chances of success.

What Factors a Lender Examines

It helps to know what factors the lender examines and takes into consideration when deciding whether or not to move forward with your loan. The first is your ability to make your current payments. Are you currently behind on your payments? It may sound counter-intuitive, but if you are, you are actually more likely to receive a modification than if you are still current. That is because banks will take delinquent clients as a greater priority over non-delinquent ones. They are protecting their investment, after all.

Another factor is your source of income. If you cannot foreseeably maintain payments on your home, regardless of whether or not you are behind, they are less likely to grant you a modification.

What is the nature of the hardship that is keeping you from making payments? If it is a permanent hardship, banks are less likely to approve the loan because they do not reasonably expect you to be able to make payments in the future.

How long have you been paying on the home? Those who have been paying on their home loans for longer periods of time are more likely to be approved.

Finally, the finances have to make sense for the bank. In other words, you have to show them that keeping you in the home, making payments – even reduced ones – is better in the long run for the bank than pursuing foreclosure. If you can show them this – and even take the extra step of preparing financial projections with you as a borrower versus the bank owning the home and going through foreclosure – then you will have a stronger case.

This last point is critical. After all, one only has to go to an online foreclosure directory, like BankForeclosuresSale.com, to see just how many foreclosure properties are available for purchase for deeply-discounted prices, all to the detriment of the banks that own them.

Turn to a Professional

One major piece of advice is to turn to a professional to assist you with your application. Start with a real estate lawyer and ask him or her to review your contract and the loan servicer’s servicing history to see if there have been any legal violations on the part of the lender since you have had the loan. If so, you are in a very powerful position, as banks are very vulnerable currently to lawsuits for mortgage loan fraud and abuse.

Even if you can find no legal violations, you can still obtain help. Ask an accountant to review your finances and put together a convincing case for the bank to consider. Consult with a mortgage loan counselor who can help you prepare your application. Talk to a credit counselor to repair your credit score, which is reviewed when you pursue a modification. Find a second job if you must in order to provide more income, which always helps.

Communicate Early and Often

Finally, you can increase your chances of success by talking to the lender early and often. Applicants who wait until the last minute, right before their home is set to be foreclosed on, are almost always denied. Communicate to the lender your difficulty with making payments and be an open and honest participant in the proceedings.

Lying on your application is a huge no-no, as any misinformation or deception will only come back later to give you trouble you did not anticipate. There is a temptation to withhold information, but the more data you provide, the better off you will be because banks now expect a certain level of insight into your finances before they will grant you their approval.

In the end, a loan modification is a process by which you work with the lender, not against them. It can happen and does on a daily basis; hopefully now you will be able to benefit from that as well.

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