Mortgage Loan Modification

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.

What Is a Mortgage Loan Modification?

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.

How Does Mortgage Modification Work?

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.

Who Can Qualify for a Home Mortgage Modification?

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:

• Unemployment or other loss of income
• Increased living expenses
• Medical bills
• Divorce or separation
• Death of a family member
• Disability
• You are ineligible to refinance
• You are at least one regular mortgage payment behind or show that missing a payment is imminent.
• A natural or declared disaster.
• An uninsured loss of property.

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:

• Fannie Mae and Freddie Mac: A Flex Modification Program is available to homeowners whose mortgages are owned by Fannie Mae and Freddie Mac. The program allows lenders more flexibility in evaluating borrowers. If you are exiting mortgage forbearance and not yet capable of making your monthly payment, a flex program might be the next logical step.
• FHA Loans: The FHA Home Affordable Modification Program (HAMP) is available for homeowners with FHA insured mortgages who do not qualify for other loss mitigation processes. It requires the homeowner to complete a trial payment plan.
• VA Home Loans: VA home loan applicants with poor credit histories, including bankruptcy and foreclosure, can often qualify for VA loans more easily than if they sought conventional financing.
• CARES Act financial assistance provisions: The Coronavirus Aid, Relief and Economic Security Act (CARES Act) allotted $2.2 trillion to provide fast relief to people in need of Covid-19 financial assistance.

Some private lenders may be extending relief programs similar to the ones provided in the CARES act.

What Types of Loan Modification Programs Exist?

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.

Next Steps When You Need to Modify Your Mortgage

 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:

• Income: How much you earn, its sources, and other financial resources.
• Expenses: A record of your spending — how much, and where it goes; be prepared to categorize (housing, transportation, food, clothing, etc.)
• Documents: Back up your statements with paystubs (or profit/loss statements if you’re self-employed), bank and credit card statements, loan agreements, investment reports, recent tax returns and other vital documents.

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.

Tips for Getting a Mortgage Modification Approved

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:

• Apply as soon as you can. Home mortgage modifications aren’t a sure thing and they can prove more difficult to secure if you wait until foreclosure proceedings are underway.
• Pay attention to detail. The lender will carefully review the information you provide. Understating or overstating your income can result in an application denial.
• Send in all items requested by your loan servicers. They won’t process your application until all forms are completed and received. Again, details, details. Pay close attention to them.
• Hold on to all information provided by your servicer. Sometimes they make mistakes. You will need documentation of all correspondence if you challenge a foreclosure based on the servicer’s failure to follow servicing laws.
• Put together a new monthly budget. Your servicer should know you’re serious enough to cut out all unnecessary spending.
• Write a hardship letter and put careful thought into it. Lenders might respond to your heartfelt reasons for wanting to keep your home at all costs, provided all your documents are submitted and the financial projections support your ability to make good on a modified loan.
• Learn the laws governing mortgage modification. Being informed beats the alternative when it can mean the difference between staying in your home and foreclosure.

What Can Go Wrong?

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.

Mortgage Modification Alternatives

Righting the ship again may be difficult but it’s not impossible. And there are other options available to distressed homeowners.

• Mortgage Refinancing — A 15-year refinancing would offer long-term savings but it isn’t a practical alternative since the monthly payment would increase in the short term. For someone already having trouble making monthly payments, securing a 30-year fixed rate refinancing with a higher interest rate but lower monthly payment is a better option.
• Mortgage Repayment Plans — This could be an option if refinancing isn’t. It allows the homeowner to spread out the past due amount over several months – added to your current mortgage payment.
• Help Paying Your Mortgage — Help doesn’t come without strings but not much else does either.Check with your lender or a Fannie Mae Mortgage Help Center.
• Mortgage Forbearance — With forbearance, a homeowner and lender agree to suspend or reduce mortgage payments for a specific period of time. The reason could involve disability, job loss, divorce, a natural disaster or other life-altering events. Forbearance does not affect credit scores but the circumstances – missed payments – that lead to forbearance will impact that score.
• Mortgage Credit Counseling — It’s too simple to say if more first-time homebuyers relied on mortgage credit counseling there might be less need for home loan modifications or other remedial programs to help distressed homeowners. Sometimes, life events simply sabotage our best-laid plans. But certainly mortgage credit counseling can be an important tool for the home buyer in need of mortgage payment relief.