Even in the best of times, making monthly mortgage payments is rarely as comfortable as a pair of old slippers.
The real estate “boom” is misleading. Houses might be selling for over asking price but that doesn’t help non-sellers losing ground financially and trying to stop the slide into foreclosure.
The bad old days of troubled mortgages crying out for home loan modifications are still here. The need for mortgage modifications certainly didn’t disappear in the wake of the Covid-19 pandemic.
Some borrowers are looking (desperately in many cases) for the kind of relief offered by mortgage loan modifications.
Some modification might just work for lenders, too.
Simply put, loan modification is a change that lenders make to the terms of an existing mortgage.
Such changes usually are made because the borrower is unable to repay the original loan. Most successful loan modification processes are negotiated with the help of an attorney or a settlement company. Some borrowers are eligible for government assistance in loan modification.
What’s in it for the mortgage company?
Loan modification isn’t nearly as costly to the lender as default and/or foreclosure. The mortgage company wants to keep you in the house just as much as you want to stay.
Home loan modification could mean lengthening the terms of your loan, lowering your interest rate or changing from an adjustable-rate mortgage to a fixed-rate loan. The goal in each case? More manageable monthly payments.
While modification likely will impact your credit score negatively, it won’t impact it as drastically as foreclosure would.
The top candidates for mortgage modification are homeowners behind on their payments, or in danger of falling behind, and those who are faced with potential foreclosure as a result of unanticipated or unavoidable (and demonstrable) financial hardship.
Contributing factors that may spur a home loan modification request include:
Lenders almost always examine the borrower’s claims and weigh them against the likelihood the customer can fulfill the obligations of the modified loan.
If a homeowner’s mortgage is backed by federal agencies or programs, they may be eligible for government mortgage loan modification programs.
Government mortgage loan modification programs include:
Some private lenders may be extending relief programs similar to the ones provided in the CARES act.
If nothing else, the Great Recession and mortgage crisis made lenders and mortgage-servicing companies more attuned to the needs of at-risk homeowners. (It helped to have Congress and the White House breathing down their necks, but let’s not quibble about progress.)
Nowadays, most lenders have programs designed to see borrowers through tough times while keeping them in their homes. If your lender doesn’t, ask them or a Housing and Urban Development (HUD) approved counselor about your eligibility for programs that can assist you through the modification process.
HAMP — the Home Affordable Modification Program — expired at the end of 2016. Its successor is the Flex Modification program, overseen by Fannie Mae and Freddie Mac. Borrowers whose mortgages are subject to Fannie or Freddie may qualify.
HARP — the Home Affordable Refinance Program — helped refinance underwater homeowners into new, more affordable mortgages. HARP expired at the end of 2018. Now there are Fannie Mae’s High Loan-to-Value Refinance Option and, from Freddie Mac, the Enhanced Relief Refinance program.
When you’re certain there’s going to be trouble, contact your mortgage holder (mortgagee) immediately, over the telephone or online. Explain your situation and inquire about the available options. Other factors being equal, lenders are more likely to work with at-risk clients who are proactive about their predicament.
Modification applications vary from lender/service to lender/servicer. Most likely, you will be asked to provide proof of your financial hardship; some will require a letter explaining your hardship and why a modification is necessary.
Beyond that, be prepared to document your finances in detail, no less than when you applied for your original mortgage.
Some of the information you’ll be asked to provide:
Just like a mortgage application, a loan modification application can take hours to complete. Once you’ve gathered the documents and related information — which can be time-consuming, even for the well-organized applicant — there will be forms to fill out. Also, your lender is likely to be extremely particular about how it wants information formatted.
Once everything is submitted, make certain you keep your information updated, with replacement documents in timely order. A common complaint among loan modification applicants is that lenders ask for the same document over and over, most often because the original documents have gone out of date. (Yours isn’t the only modification they’re processing, after all.)
It may take weeks before the lender provides an answer, and weeks more to alter your loan, if you get approved. A majority of applications are denied. Meanwhile, believe it or not, the clock continues to tick on foreclosure.
Getting a mortgage modification approved is not easy, but it can be done if you’re willing to put in a little extra work preparing the necessary documents for the lender.
Some tips on how to get ready include:
Mortgage loan modifications are not without pitfalls. No matter how focused your attention to detail, your credit score almost certainly will take a hit with a home loan modification. Often, a homeowner won’t get approved for a loan modification unless there is evidence of one or several missed payments. Those missed payments hurt your credit score. A home loan modification does the same.
Beyond the stories of lenders losing documentation (make copies of everything you send) or simply refusing your application despite your best efforts to comply with their every request, beware scam artists who will claim to work on your behalf.
Consult with a HUD-certified counselor if possible. Or, in more complicated financial cases, find a real estate attorney experienced in home loan modifications.
Have you done everything within reason to keep your payments current? Can you show evidence you’ve cut your expenses or found ways to increase income? Again, a HUD-certified counselor could be your best bet as a sounding board.
Home loan modification applications get turned down for a variety of reasons. There is an appeal process but, again, timing is everything. You can only appeal if you sent the request for mortgage assistance in 90 days before your foreclosure sale and the bank denied you for any trial or permanent loan modification programs it offers.
The appeal must be submitted within 14 days after the servicer denied your original application. The servicer must assign the appeal to someone who was not responsible for the original decision to deny your application.
If you are denied a second time, you can’t appeal again. If the servicer decides to offer you a loan modification, you have 14 days to accept or reject it.
Unfortunately, anyone in financial distress is a target for scam artists.
Stay alert. If a bailout offer sounds too good to be true, it probably is too good to be true. Beware of anything or anyone requiring an upfront fee to do something you can do yourself.
Your lender wants you to be successful in repaying the loan, so if there is a way to make that possible, they’ll help you find it.
Righting the ship again may be difficult but it’s not impossible. And there are other options available to distressed homeowners.