How the Mortgage Loan Modification Process Works

What You Need To Know

How the Mortgage Loan Modification Process Works
February 15, 2013

Get the Lowdown on the Process

There are quite a few reasons why homeowners contact their financial institutions to determine whether they are eligible for a mortgage loan modification. Some are simply looking to take advantage of the historically low rates that are now available. Others are hoping a modification will lower their monthly mortgage payments, resulting in more available spending cash throughout the month. In other circumstances, a mortgage loan modification might be a step to take to avoid an impending foreclosure. At the end of the day, regardless of the reasons for pursuing a modification, the goal is generally the same: to modify the loan so the payments are more affordable.

Your first step is to contact your current mortgage lender

Since homeowners must qualify for a restructuring, the best place to start is with the company who gave you the loan in the first place. Be warned — this is not always a guarantee! You remember how challenging the process was to simply get the loan? Since time has passed, the lenders will be looking at your payment history, the value of your home, and many other factors to determine whether you’re eligible as though you are purchasing a brand new home with a brand new loan. In effect, that’s what this process is — an entirely new loan. As you can imagine, if you’re looking for a restructure to avoid a foreclosure, your options might be extremely limited (although not impossible).

When making this call, you must be prepared to discuss your overall situation in great detail. You will need to answer the following questions: What is your financial situation? Are there any current or past hardships you’ve encountered that might have an impact on your ability to pay the mortgage? Again, there is a “qualification” phase to go through here. Therefore, make sure you are prepared with the same type of information that was required when you originally applied for your loan because you’ll need current information for this process to begin.

If you are considering a modification due to a hardship, one suggestion is to spend some quality time developing an ideal hardship letter. Why are you in your current financial situation? What are you doing to improve your situation (aside from a modification)? You’ll want to be sure you keep the letter short and sweet, but be sure you’re clear about the circumstances that have put you in this position and, above all, be brutally honest with yourself and with your lender!

Be patient

The process itself is widely varied, but one thing you can expect is that it will NOT be done overnight! The qualification and review period can take 30, 60, or even 90 days to complete and may still result in a declined application. Of course, providing all of the required information in its entirety upfront will help the process move forward. Current financial information, hardship documentation, and any other required information provided in a timely and complete manner will keep things rolling in the right direction.

Once the process is completed and you are approved for a modification, you then receive notification of the changes offered. At that point, you have the opportunity to either accept or reject the proposal. If everything looks good, you simply accept the new terms and begin making your payments based on the new loan.

One thing that is important to note: if your home is in the foreclosure process, going through a modification application will not stop the foreclosure from continuing. If you believe that a foreclosure is a possibility for you, do not delay in getting the modification process moving, as it might put a stop to the foreclosure before it begins.

Options to consider

There are quite a few options to be aware of when it comes to modifications. Short-term modifications, such as temporary interest rate reductions or extensions of the payback period, are options that might be presented. Switching to an “interest only” loan for a period of time is another option. However, this means you’re only paying interest rather than paying down the principal on your home, which reduces your monthly payment but does not allow you to build equity in your home.

There are also new government programs available to homeowners who find themselves in a potential foreclosure situation. One such program enacted in 2009 known as the Federal Home Affordable Modification Program, or “HAMP,” was designed to help those who are struggling to make their mortgage payments. Although there are many qualification requirements, it’s certainly something you want to discuss with your financial advisor or mortgage lender.

You should be equally aware of the wide variety of scams that are out there. Unfortunately, given our country’s less-than-ideal financial situation, there are many individuals and companies that prey on those who are in desperate need of help. Companies that seem to promise a lot for a significant fee are out there waiting to find people in desperate situations. Many claim to have a direct relationship with your mortgage company and can “persuade” them to give you a break — for a fee. Our advice to you is to do your research, use common sense, and remember that if it sounds too good to be true, it probably is!

To sum things up, the mortgage loan modification process is no less complex than your original loan process. If a hardship is involved, it will just add another level of complexity to the process. Therefore, if you are considering a loan modification, you must be detailed, you must be patient, and you must get started sooner rather than later!

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