LOAN MODIFICATION

If you feel overwhelmed because you think may need a loan modification but don’t know where to turn, you are not alone. Millions of homeowners are looking to get their loans modified. With all of the information circulating, many don’t know where to begin. Don’t panic. Help is available.

What Is a Loan Modification?

A loan modification, also called a mortgage modification or loan workout, is a process lenders and borrowers go through together to change the terms of their original mortgage agreement. Loan modifications are for borrowers who are having trouble making their payments and are at risk of delinquency, default or foreclosure. The lender and borrower work together to determine the type of solution that will be of maximum mutual benefit.

Many borrowers are already getting their loans modified. President Obama’s Homeowner Affordability and Stability plan is essentially a loan modification program that offers incentives for lenders to rework borrowers’ existing loans into new loan programs that can help keep them in their homes. Loan modifications generally cost the lender less money than a foreclosure, so lenders have an incentive to help borrowers in this way.

Loan modifications are not the same as refinance transactions. Refinancing involves paying off an existing mortgage with a whole new loan. With a loan modification a lender and a borrower renegotiate their existing mortgage contract by mutual consent.

Loan Modifications and Upfront Costs

MortgageOutreach.org does not endorse any individual or firm that charges an upfront fee, unless they’re nominal processing fees of $100 or less. Servicers charge administrative fees, typically ranging between $300 to $600, only upon the successful completion of a loan modification. Fees are paid at closing and are often added into the principal balance of the newly modified loan. Many companies, individuals and even law firms are charging $1,000 or more in upfront fees. If you encounter one of these companies, steer clear.

Do I Have to Be Late on My Payments to Qualify?

You do not have to miss payments to qualify for a loan modification. Under the current guidelines for Fannie Mae and Freddie Mac, mortgage holders who are current on their payments may be eligible for help.

The Ways Loans Are Modified

In a loan modification, lenders can reduce interest rates, change the terms from an adjustable to a fixed rate, reduce the principal balance and/or fees, or adjust the length of the loan term.

The most common loan modification starts with a temporary interest rate cut, which reduces payments temporarily and gives the distressed homeowner some breathing room. The interest rate reduction usually lasts about three months, but can be extended by the lender to as long as five years. This shorter initial period gives the lender a chance to evaluate if the borrower can make payments on time. If so, there’s a better chance the interest rate cut will be made permanent.

Another type of loan modification involves a reduction to the principal balance, which reduces the actual amount owed on the house. This is usually rare, but the Obama Affordability Plan compensates lenders who grant at least a temporary reduction in principal to get monthly payments down to about 31 percent of the borrower’s gross income. Another part of the program can reduce the principal by as much as $5,000 over time if the borrower keeps current on his or her payments.

Lenders also sometimes grant a loan modification called a forbearance when homeowners are late on payments. A forbearance is when the lender agrees not to exercise the right to foreclose on a property and instead agrees upon a temporary payment plan that will bring the borrower current. In these cases, a payment schedule is drawn up and the missed payments are made up over time.

Another way loans are being modified is by extending the term of the loan, which can now be as long as 40 years.

Qualifying for Loan Modification

Generally, borrowers have to prove financial hardship to qualify for a loan modification. Examples of hardship include job loss or cutbacks in wages and other income, as well as illness, divorce, or a death in the family. A signed statement of financial hardship is a required part of this process.  As with any contract, a signed statement is an important part of the transaction.  By signing a hardship agreement you will be formally stating that the information is true and factual.  In addition, you’ll have to provide proof of income, bank statements and tax returns.

The ideal option is always refinancing if borrowers can qualify, as it’s currently unclear how loan modifications may affect credit ratings. Other options include a short-fi or a short sale.