You might have heard stories of people being in loan modification hell – of being put through a constant runaround with banks that say they “lost” loan modification paperwork or that put people in a trial period only to end up denying the modification. The government has even offered incentives to encourage banks to do loan modifications. This is more proof that lenders don’t want to do them. If a loan modification can save a home from foreclosure, it would seem as if lenders would welcome this option, but history shows that is not the case.
They Lose Money
Lenders would prefer that you stick with your original loan agreement because they make the most profit that way, assuming you can make your payments each month. Loan modifications typically reduce the interest rate or stretch out payments. They usually do not lower the amount owed. Lenders have a formula they use for approving or denying your loan modification request – you can neither make too much nor too little income, according to Marcie Geffner of Bankrate. If you make too much, lenders assume you can pay your original loan agreement. If you make too little, the lender is not convinced you would be able to afford even a modified payment plan. Both cases cause lenders not to want to do a loan modification.
They Don't Want to Set a Precedent
If you apply for a loan modification because you are underwater on your loan – you owe more on the house than it is worth – you are surely not alone. After the mortgage meltdown of 2008, far too many people found themselves in that category. Therefore, lenders are worried that if they modify a loan for you, they will receive an avalanche of loan modification requests once the word gets out.
They Don't Have Adequate Staff
Modifying a loan creates more work for lenders or mortgage servicers that often do not have adequate staff to handle the volume of loan modification requests they receive. Many lenders are not eager to add staff just to take on loan modification duties that will not necessarily result in a profit for them. Frequently, foreclosure or short sale is a quicker and easier process for lenders and mortgage servicers.
Tips to Get a Loan Modification
Although lenders can be reluctant to grant a modification, some do go through. Bankrate put together tips on how to better your chances of getting a loan mod based on advice from housing counselors. Applicants must send in a complete package with everything the lender requests. This typically includes paycheck stubs that show a month’s income, a hardship letter and a budget. Call the lender once a week to check on your application. Re-send any documents the servicer requests, even if you are frustrated. Your paperwork should be neat with the loan number and title of the document on everything you submit to make it easier for the servicer to process. You must sign IRS form 4506-T that allows the lender access to your federal tax returns. If you cannot provide adequate proof of income, you are unlikely to be approved.
- PBS NewsHour: Nightmarish Stories of Mortgage Modification Woes
- San Antonio Express News: Ilyce Glink: Not many ways out of Loan Modification Hell
- Bankrate: Borrowers Look for Mortgage Modification
- Market Watch: Mortgage-Modification Program Has Major Flaws
- Bankrate: Tips For Getting a Mortgage Loan Modification
- Keith Brofsky/Photodisc/Getty Images