A Loan Modification involves an agreed upon permanent change in the terms of your mortgage between you and your financial institution for the reason of reinstating your mortgage and making your payment affordable. This may be done by cutting the interest rate and sometimes the principal amount or extending the number of years you have the mortgage (example from a 15 year to a 30 year and is also known as the amortization period).
This agreement can be made even before you experience foreclosure. It fact, it's best to contact your lender before you are not able to make your mortgage payment and can offer them proof as to why (for example, layoffs, unemployment, illness, disability, etc). The lender will request that you submit a hardship letter to verify your request. In most cases they will not accept your home being "upside down on your mortgage as a valid reason.
The best place to begin in considering a loan modification is to do a lot of research from reputable sources such as makinghomeaffordable.gov, hud.gov (which has links for information by state), and EconomicRecovery.gov. Foreclosure has become so commonplace that just as many scams have popped up in response. According to the Federal Trade Commission website, here are some warning signs to look for and they warn to avoid any business that:
"guarantees to stop the foreclosure process - no matter what your circumstances"
instructs you not to contact your lender, lawyer, credit or housing counselor
collects a fee before providing you with any services
accepts payment only by cashier's check or wire transfer
encourages you to lease your home so you can buy it back over time
tells you to make your mortgage payments directly to it, rather than your lender
tells you to transfer your property deed or title to it
offers to buy your house for cash at a fixed price that is not set by the housing market at the time of sale
offers to fill out paperwork for you
pressures you to sign paperwork you haven't had a chance to read thoroughly or that you don't understand.
There are also free HUD-approved foreclosure counselors you can reach at 1-888-995-HOPE (4673). They will not negotiate with your lender, but they will give you information and advice on the whole process.
After doing the necessary research, a loan modification begins by contacting your lender and informing them of your financial circumstances as soon as possible. You will need to submit to them proof of your current monthly gross income and expenses - both to show why you can't afford your current mortgage and at what amount the new lower payment could be reasonably set at with your income. This will include pay stubs or documentation you have of your income. They will want information on the previous year's tax return, any savings you have, and account balances on all of your credit cards (and what your minimum monthly payment is). They may also request a letter detailing the circumstances of your financial difficulties. It's important to know that information before you begin talking to your lender. Take detailed notes of any and all conversations that you have and who you speak to. The process can take a few weeks or a few months depending on the situation of the lender's loan portfolio.
What is important is that you start as soon as you know you have a problem or when you know you will be having a problem financially. Do not be surprised if the lender's representative tells you have to be late on your mortgage payments. These late payments will affect your credit score immediately so be prepared. However, there are ways to "pressure" your lender into negotiating in good faith more quickly which we will cover in future articles.
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