*This is good information from Amy Loftsgordon, Contributing Editor at Nolo.com
If you are a struggling homeowner trying to avoid foreclosure, a mortgage loan modification that lowers your monthly mortgage payment might be the perfect solution for your situation. Even though the process might seem intimidating, you can apply for and obtain a loan modification on your own without paying for assistance. Read on to learn more about how loan modifications work, how to apply for a modification, and how you can navigate the process on your own.
What Is Loss Mitigation?
Loss mitigation in the mortgage business is a process where borrowers and their lender work together to prevent foreclosure. There are several different kinds of loss mitigation, such as:
short sales, and
deeds in lieu of foreclosure.
Perhaps the most sought-after form of loss mitigation is a loan modification.
Understanding Loan Modifications
A loan modification is a written agreement between the borrower and the lender that permanently changes the original terms of the promissory note to make the mortgage payments more affordable.
In certain situations, a lender can do one or more of the following things to get your monthly payment down to a level that you can afford:
lower the interest rate
lengthen the repayment term, or
reduce the principal balance.
(Generally, lenders do not like to approve first-mortgage principal reductions as part of a loan modification. However, there are some programs which combine principal reduction assistance with loan modifications. For more information on the various programs available, visit our Loan Modification Resources, Forms, Files & Links page.)
Different Loan Modification Programs
Depending on your situation and circumstances, there are several different loan modification programs you may qualify for, including:
Fannie Mae and Freddie Mac’s Streamlined Modification Initiative.
A proprietary (in-house) loan modification.
Loan Modification Problems During the Mortgage Crisis
During the mortgage crisis of the late 2000s, mortgage servicers commonly committed egregious servicing errors such as failing to handle loss mitigation applications appropriately. (A mortgage servicer is the company that collects monthly mortgage payments, tracks account balances, manages the escrow account, handles loss mitigation applications, and pursues foreclosure in the case of defaulted loans.)
Borrowers seeking loan modifications during this time almost always got the runaround from their mortgage servicer. It was next to impossible to talk to the same person more than once, paperwork got lost, and, worst of all, the servicer would keep the foreclosure moving forward while at the same time letting the borrower think that a loan modification was forthcoming (called dual tracking).
New Laws to Help Homeowners in the Loan Modification Process
As a result of the problems during the mortgage crisis, new rules and laws designed to protect homeowners in the loan modification process came about. For example:
In late April of 2013, the Office of the Comptroller of the Currency issued minimum mortgage servicing standards to ensure that borrowers receive a pre-foreclosure sale review and that a loan modification is appropriately considered. Read more about Federal Standards For Mortgage Servicers Handling Imminent Foreclosures.
On January 10, 2014, new mortgage servicing rules designed to protect borrowers when it comes to mortgage loans and loss mitigation go into effect. Read more about New Federal Rules Protecting Homeowners With Mortgages.
California passed the Homeowner Bill of Rights, which regulates how mortgage servicers handle loan modification applications.
The $25 billion national mortgage settlement restricts the nation’s five largest mortgage servicers (Bank of America, Citi, JPMorgan Chase, Wells Fargo, and Ally/GMAC) from dual tracking.
Now, servicers generally try to work with customers who are facing financial difficulties to keep them in their home if at all possible. They have increased their personnel and streamlined the process to better keep up with increased loan modification requests. If you want a loan modification, it is easier than ever to navigate the process on your own since the loss mitigation process is much better regulated and structured than it used to be.
Contact Your Servicer’s Loss Mitigation Department
If you want a loan modification, the first thing you should do is contact your servicer’s loss mitigation department (sometimes called a home retention department). You can typically find contact information on your monthly mortgage statement or on the mortgage servicer’s web page.
One Point of Contact
One of the big problems in the past was that homeowners who called their lender to apply for a loan modification had to explain their circumstances repeatedly, often to several different representatives. Currently, in many instances, you’ll be assigned one person to work with you through the process who will explain each step along the way.
For example, the national mortgage settlement and the California Homeowner Bill of Rights require that the servicer appoint a single point of contact for homeowners who are potentially eligible for loan modifications or other foreclosure prevention alternatives.
Additionally, Making Home Affordable guidelines require the 20 largest servicers to appoint what they call “relationship managers” to serve as the homeowner’s single point of contact when being evaluated for a potential HAMP modification. The relationship manager is responsible for communicating and working with the borrower through the entire process. If the loan is later referred for foreclosure, the relationship manager must be available to respond to borrower inquiries regarding the status of the foreclosure. While these rules apply only to the largest servicers, the U.S. Treasury encouraged all participating mortgage servicers to adopt the new guidance for providing borrowers with a single point of contact, and most have agreed to do so.
The Loan Modification Application
To obtain a loan modification, you’ll need to submit an application to your mortgage servicer. Often you’ll need to provide:
a completed application (including your personal information, mortgage information, property information, and so forth)
recent paystubs (or a profit and loss statement if self-employed)
income/expense financial worksheet, and
Benefits of a Do-It-Yourself Loan Modification
In most cases, you are better off filling out the application and gathering the required documents on your own rather than hiring someone to assist you. Here's why.
Saves money. It is much cheaper to just do it yourself than paying an attorney or a loan modification company to do the paperwork for you. All it takes is a little effort on your part and you'll save a lot of money.
Scams abound. The majority of loan modification companies are scams. They will take your money and you’ll get very little in return, certainly nothing that you couldn’t have done yourself. These companies may tell you they are experts at negotiating a loan modification, but there is no trick to getting a loan modification. There is very little negotiating that occurs in the process. The lender has certain requirements that borrowers must meet in order to get a loan modification, and if you meet them, you will be given a modification. We give this FREE information to help...not make things worse.
Efficiency in responding to inquiries. If you work on the loan modification process yourself, you can respond to any inquiries or requests from the mortgage servicer in a timely manner. Loan modification companies often fail to respond to requests from the loan servicer, which can lead to the loan modification request being denied. Also, you are in the best position to respond to any inquiries because only you know all of the details of your particular situation.
Getting Free Help
If you find that you are having difficulty with your application or need help in submitting your loan modification request, you can get free assistance from a HUD-approved housing counselor who will work with you and your mortgage servicer on your behalf.
Avoid These Mistakes On Your Loan Modification Request
By Eric D. Muhammad
If you want to handle the loan modification process yourself, you have to know what to do, but more importantly, what not to do! Let’s look at a few things you should never do when preparing your loan modification application.
This is important information if you want to increase your chances of getting your loan modification approved. Homeowners may not realize that they do have some control over whether their loan workout is granted.
By making sure that their loan modification forms are completed properly and have the best chance of meeting their lender's approval guidelines. The fact is that your bank will base their decision mainly on what they see on your loan modification application paperwork, so make sure you avoid these mistakes that could cost you an approval.
Not telling the truth, the whole truth and nothing but the truth when applying for mortgage loan modification. There’s a big chance you will get caught, which will result in you losing any chance whatsoever of being accepted for a mortgage loan modification.
Incomplete, inaccurate or missing information can be a real problem. Your lender WILL check up on the facts you provide with your mortgage loan modification application, so don’t even try to tell a white lie or omit information. Did you know that your bank will run your credit, review your bank statements and then compare this information against the information you provided on your loan modification forms? Any missing or inaccurate information could cause your application to be delayed and even denied! You can avoid this mistake by making sure you disclose all of your debts, obligations and income accurately.
Not completing your financial statements so that they prove in black and white that you cannot afford the current payment, but will in fact be able to afford and maintain your new modified mortgage payment. The biggest reason for a borrower not getting the loan modification they need is not proving to their lender that they will not be a risk for re-default after the loan workout. You must assure your bank that you will be able to pay the new modified Target payment. How can you do this? You can prove this clearly and decisively when you use accurate financial statements and follow the detailed directions provided for completing those forms.
Not doing proper preparation for a mortgage loan modification. If you don’t take the time to study the mortgage modification process, save yourself the hassle of sending in the paperwork. There’s an enormous chance you’ll get declined, because you haven’t prepared properly and you'll end up trying to piece together a loan workout that doesn’t meet the approval criteria and guidelines of your lender.
This shows the lender that you did not take the time to go through the paperwork and you did not read up on the approval criteria and guidelines. This is one of the quickest ways to get your application denied, so take the time to read up on your lenders loan modification approval guidelines before you prepare and submit your forms. When you do not know what your bank needs to see in order to approve your loan workout, you’re just taking a shot in the dark! Not very smart when your home is on the line.
Again, you need to make the effort to learn what your bank is looking for to approve your loan modification application, then prepare your forms so that they have the best chance of meeting those approval guidelines. Once you know what your target payment is, and that it meets those guidelines, you will have the edge you need to help get your loan modification approved.
Trying to negotiate with the wrong person. You may get called at home by someone from the collections department about your unpaid mortgage bills. Don’t bother trying to talk with them about mortgage loan modification. These people are unable to help you and are just calling to get the money. You’re better off contacting the correct department of your lender, so you can speak with someone that can actually help you out.
Paying a mortgage loan modification company a big upfront fee. There are a lot of mortgage loan modification companies springing up left and right because of the high number of foreclosures. They all want to get a piece of the pie. Be sure you check their credentials and know that you’re dealing with an ethical, reputable company before giving them your money. The objective is to get out of the hole, not deeper in it.
Federal housing law makes taking money up front for a loan modification illegal. Many loan modifications get around this by affiliating themselves with a lawyer, and collect a retainer for legal service. Others collect a processing fee for submitting your loan package.
Either way, be warned that paying to have a loan modification company do your modification application for you does not guarantee success. And, there are many unscrupulous characters moving in to this space.
The Department of Housing and Urban Development (HUD) urges extreme caution if you choose a company to represent you in the modification process.
Now that you know what NOT do, you can learn what to do by learning and preparing ahead of time. Your application will look good to a lender if you don’t make the mistakes we’ve outlined here. You can learn the basics of a successful mortgage loan modification in a couple of hours so you can greatly increase your chance of getting the help you need. The final decision is up to the lender, but taking the time to do your mortgage loan modification right greatly increases your chances of being accepted.
You can get the help you need to prepare your loan modification forms correctly by following the Do It Your Self Mortgage Loan Modification steps 1 through 6 that are easy to read and follow and will provide you with mostly everything you need to prepare a professional and acceptable loan modification application. The Do It Yourself Mortgage Loan Modification steps 1 through 6 will take you step by step through calculating your debt ratio, completing the financial statements, writing your hardship letter and then putting it all together to submit to your lender. Get started today on the path to secure home ownership. Home Retention
By Eric D. Muhammad