Struggling homeowners are often under the misconception that a loan modification will lower payments. Missed payments, taxes, insurance, interest and late fees must be repaid. When you apply for a modification, the lender rolls all the money owed into the loan balance. A loan modification lowers the interest rate and may extend the length of the loan, but this may not reduce the mortgage payment.
Contact your mortgage company before you fall too far behind. Typically, loan modifications result in a payment increase when a borrower is very delinquent. Most lenders require you to miss at least two payments before considering a loan modification. If you haven't yet missed any payments, consider refinancing or requesting a forbearance. In a forbearance, the lender agrees to temporarily postpone payments until you can get back on your feet.
Ask about a principal reduction. Certain banks offer borrowers a principal reduction to lower the total amount owed on the loan. In 2012, The U.S. Department of Justice and the state attorneys general agreed to the terms of a global settlement with mortgage lenders to offer qualified borrowers principal reductions. To qualify, you must be at least 60 days delinquent and your home must be worth less than you owe. The maximum forgiveness amount is 30 percent of the remaining principal balance.
Initiate the process. Although the most well-known modification is the Home Affordable Modification Program, lenders also offer private modifications. The lender will determine your eligibility and send you the proper paperwork. A loan modification application generally requires you to list all debt, expenses and sources of income. The lender will pull a copy of your credit report just in case there is some debt you may have missed. Even if an old account is in collection, it counts towards your debt-to-income ratio. You may need to submit recent pay stubs, W-2 forms and income tax returns. For HAMP, applicants must complete a hardship affidavit. Possible hardships can include a loss in income or an increase in monthly expenses. Your lender may want a hardship letter explaining the circumstances, such as a medical condition or injury.
Submit the paperwork and documents promptly. You want to act fast to avoid falling even further behind on the loan. Any errors can delay the process.
Pay your mortgage on time after gaining approval. According to Realty Times, the loan modification process typically takes up to 90 days. Approval times can vary depending on the lender and whether or not further documentation is required. If your mortgage payment is lowered through the modification, you will need to prove you can afford the new payment. A three-month trial period is a standard part of HAMP. During the trial period, the foreclosure clock continues to click. During this stage, you aren't in the clear. Even if a payment is lost in the mail, the lender can proceed with the foreclosure. HAMP rules give borrowers 30 days to respond and appeal to a non-approval notice before moving abead with the foreclosure.
- Bank of America: Principal Forgiveness Can Help Qualified Homeowners Who are Past Due and Underwater
- Making Home Affordable: Home Affordable Modification Program (HAMP)
- Yahoo Finance: Bank of America Offers Principal Reductions to 200,000 Homeowners
- Mortgage Loan: Improve Chances for Loan Modification
- Center for American Progress: Sharing the Pain and Gain in the Housing Market
- Realty Times: How Long Does a Loan Modification Take?
- If the bank offers you a modification that raises your payment, you don't have to accept. You may want to explore other options, such as a short sale. In a short sale, the lender agrees to accept less than the balance owed on the loan. A deed in lieu of foreclosure is another option for homeowners. If the home does not sell after attempting a short sale, the lender may allow you to relinquish ownership rights by signing back the deed. The Home Affordable Foreclosure Alternatives program even offers relocation money to homeowners who successfully complete a deed in lieu. For help with the loan modification process of other foreclosure prevention methods. you can contact a HUD approved foreclosure prevention counselor.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.