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Mortgage Loan Modifications 101

Feb 14, 2009 - We've all heard the horror stories by now and may have seen U.S. Congresswoman Maxine Waters's appearance on Nightline, in an attempt which ended in frustration and futility, to try to assist several of her mortgage distressed constituents in their loan modification process.  Clearly this process is not for those who don't have a lot of spare time on their hands or for those who take rejection easily. However, if you are a distressed homeowner who truly wants to stay in their home and you are confident that if only your mortgage payment was shaved by a few hundred dollars this would clearly be possible, then by all means you must persevere and proceed as follows.    

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Step One:

Assess where you are.  Have you missed any mortgage payments, if so how many?  If you have missed your last three payments a notice of default may have likely been issued by your mortgage lender or servicer?   Do you have an adjustable rate mortgage which is due to reset in the next few months?  If you have answered yes to any of the aforementioned questions then you may be ready (after completing step two) to contact your lender or loan servicer in an effort to modify your loan. 

Step Two:

Complete a household budget, essentially your domestic profit and loss statement.  List your monthly income (include all sources of income of each person residing in the home, except for tenants renting space or a room in the house which you may include as rental income).  Any irregular or periodic income received will need to be reflected on an annualized basis.  Then list all monthly household expenses, taking any annual, semi-annual or quarterly expenses you have and converting them to a pro-rated monthly expense.   Keep in mind that you may be asked by your lender to document your earnings so it is important to keep good records.   

For a sample budget form see the following:
http://financialplan.about.com/library/n_budget.htm  

It's also important to note (and should go without saying) that you'll want to eliminate all non-essential expenses from your budget for example: dining out, entertainment, fitness, consumer electronics, hobbies, vacations, non-work related subscriptions and dues, investment and savings contributions, gifts/donations as well as extensive personal grooming and pet related expenses.  The aforementioned expenses could be viewed by your lender as unwarranted luxuries and they may be less inclined to approve your loan modification if you are contributing to them.  In other words use common sense, you have already likely cut any frivolous/extravagant expenses from your budget if you are struggling to make your mortgage payment but I will state the obvious anyhow.   

The amount of surplus income (or positive cash flow) remaining after total expenses are deducted from total income should fall somewhere between $100-$250 dollars.  Note the amount of acceptable surplus income will vary amongst lenders and servicers but this is typically the acceptable range.   If you have negative cash flow or a deficit, then you are likely in serious financial trouble and a loan modification is unlikely to be a permanent solution to your financial problems.  Your lender or loan servicer will only want to modify your mortgage if it will result in a long term solution for everyone involved.  If it appears that you will only return to financial instability/insolvency within a short time, then your lender will be very unlikely to view modifying your loan favorably.  

Step Three:

Contact your lender and I cannot emphasize this enough, be courteous to all persons on the receiving end of your phone calls.  Remember it is not that particular individual's fault that you are in this situation and if you are not an easy person to work with, it is human nature to move on to the next person in line who is.  The key to avoiding frustration here is to be sure that you are speaking with someone who can actually help you at the outset: so ask to be transferred to the “loss mitigation department” however before being transferred, ask the operator to give you the direct number for that department (note this number may be subject to change frequently so be sure to obtain the current one).  Once you've reached someone within the loss mitigation department make note of the full name and title of the person you are speaking with and jot down all pertinent details of your conversation as part of an ongoing record or conversation log.  Also at the end of the call, be sure to obtain a case or reference number (this may simply be your loan number). 

Every lender will have a different process but essentially your initial contacts within the loss mitigation department will function much like a loan processor would, they advise and collect information from you to determine the likelihood of your successfully completing the loan modification process.  The main consideration in approving your modification will be whether or not you will be able to comfortably make the modified mortgage payment in the long run.   This is where your written budget from step two will come into play.   You may also be required to submit a “hardship letter” along with your household budget.  In the hardship letter you will be asked what changes may have occurred in your financial circumstances which would necessitate a modification of your mortgage payment from the time you originally applied for the loan.  Examples of a valid hardship may include: a decline in income, job loss/change, illness or medical condition, divorce, death of a co-borrower or military service.  If there are any concerns about the condition of your property, an inspection may also be requested, this may occur more frequently in cases where rental or investment properties are involved.  Follow your lender's instructions to the letter as any omissions, such as insufficient or missing documents, could cause delays and push your file to the bottom of the pile.

Step Four:

Once your modification request is complete, your file is typically turned over to a “negotiator” who functions much like an underwriter and acts as the liaison between the lender or loan servicer and the investor.  Once the negotiator has your file, a decision should follow fairly quickly, normally within several weeks.  The result of this process could yield any number of workout options, including: a modified interest rate (30 year mortgage rates) on the loan, extending the initial teaser rate on an adjustable rate loan or extending the term on the loan (a rare but possible occurrence). If your loan modification is approved and you are delinquent on your mortgage payments, your loan will be reinstated (in states using deeds of trust) and your accumulated late charges will likely be waived while your delinquent mortgage payments are likely to be tacked onto your existing mortgage balance.  The loan should now be brought current and any pending foreclosure proceedings stopped.  Now it's up to you to stay current on the new modified mortgage payment.

Final Thought: Getting Outside Help vs. Going it Alone

Having heard many pros and cons on both side of the argument I cannot say for sure whether it is better to pay someone to assist you with the loan modification process or to attempt to go it alone.  If you are a moderately financially savvy person (and be honest with yourself, you might not be in this mess if you really were) and have good organization and people skills, along with ample time available to complete the process, then you could attempt to do it yourself.  However I've heard more than a few horror stories about how brutal, and I'll add borderline harassing, the loan modification process can be if you do not have someone representing you.  If you do decide to seek outside help, be sure to use someone who is trustworthy and has your best interests at heart.  There are many unlicensed “foreclosure consultants” out there today who have hung up their shingle for business and if they do not have a real estate license, they may not be legally permitted to collect an advance fee from you for their unproven services.  Also if your property has already gone into default officially (meaning you have missed 3+ months mortgage payments) then even a licensed real estate professional acting as a foreclosure consultant may not be able to legitimately collect an advance fee from you.  You'll want to check out your own state government's website regarding the laws regulating this within your state.  Protect yourself with as much information as possible if you do decide to use outside assistance in obtaining a loan modification and be sure to choose someone who is both reliable and is compensated only after achieving results on your behalf.      

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Nancy Osborne, ERATE.com Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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