PT 1 - THE BASICS - DO IT YOURSELF HOME 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.)
PT 2 - PREPARING YOUR LOAN MODIFICATION APPLICATION
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)
bank statements
tax returns
income/expense financial worksheet, and
a hardship letter or hardship affidavit.
PT 3 - UNDERSTANDING DEBT TO INCOME RATIO (DTI)
Understanding debt to income ratio (DTI)
Debt-to-income (DTI) is the key determinant in most lending situations. In a traditional home loan the DTI plus the loan to value (LTV) play roles; but in a modification it is assumed that the LTV is negative (you are upside down on your home and unable to refinance) so the key decision factor is DTI (along with your credit worthiness as demonstrated by your monthly payment history and credit report).
PT 4 - WRITING YOUR HARDSHIP LETTER
The main purpose of a loan modification hardship letter is to convince your lender that you will be able to pay your monthly mortgage payment on time in the future if they modify your loan. The first paragraph should focus on the positive; convincing the lender that you can make the modified monthly payment.
PT 4 - WRITING YOUR HARDSHIP LETTER Continued here
Basically, your lender has to make a calculated decision based on your current financial and employment status to determine if you will be a good candidate for a loan modification.
While the “Hardships” that may have contributed to your unique scenario are important to include in this letter, all you're doing is briefly explaining the financial documents provided anyway. You're humanizing the mortgage. You're forcing the underwriter to identify with your plight. But ultimately, the underwriter/reader is concerned with converting your non-performing, imminent default to a performing asset.