You or your spouse just lost their job. You just had to take a lower paying job as the coronavirus pandemic eliminated your previous one. You and your wife couldn’t reconcile your differences and now must go your separate ways. There was an unexpected trip to the hospital that your health insurance didn’t cover. There’s a lot of ways people begin to face financial hardship.
On the bright side, there are many options available to you to prevent these hard times from taking over your life and ruining not just your credit score but your sense of normalcy. Having you uproot your family is not just a lot of work, time and effort but can be emotionally scarring and developmentally problematic for your child. Especially when it’s done out of necessity.
There are many pros and cons to getting a loan modification. In the world of foreclosures, a loan modification is the most sought-after solution when it comes to foreclosure prevention, and for good reason. This is one of the best strategies for putting payment issues related to foreclosure behind you and to help you keep your house.
First things first, let’s define exactly what we’re talking about and what it really means.
What exactly is a Loan Modification?
According to the Consumer Financial Protection Bureau,
“a mortgage loan modification is a change in your loan terms. The modification is a type of loss mitigation. The modification can reduce your monthly payment to an amount you can afford. Modifications may involve extending the number of years you have to repay the loan, reducing your interest rate, and/or forbearing or reducing your principal balance.
If you are offered a loan modification, be sure you know how it will change your monthly payments and the total amount that you will owe in the short-term and the long-term.”
Simply put, a loan modification is exactly what it sounds like. It’s contacting your bank and changing the terms of the mortgage. You can wind up with lower monthly payments but over a longer period. This also usually involves rolling up the missed payments back into the original loans. Depending on what the current market interest rates are and what your credit score looks like, you might be able to get a lower interest rate on the modified loan as well.
The big thing to remember is that this is a not a form of refinancing your home. You are not trading equity in your home for a chance to get back on your feet in making your monthly mortgage payment. You’re not paying off your current loan by taking out a new one, you’re changing the terms of your original mortgage. Some banks will have different names for the same program. As long as you are talking about financial assistance and not refinancing your home, you’re on the right path with your lender.
The big difference between refinancing and getting a loan modification depends on if you are underwater on your home and by how much. Being underwater simply means owing more in your total mortgage against the current market price of your house. This also means that there’s no equity in your home or theoretical value that you can tap into in your house.
Where to Start
The first step in this process is to connect with your lender. Don’t wait till you’ve started missing payments. The earlier you start to work with your bank, the better chance you have of working out a favorable modification and getting approval. Contrary to popular opinion, you do not need to be late or miss a payment before contacting your bank about a loan modification. If you’ve already started missing payments, don’t give up hope! Many banks are still willing to work with you and grant approval on loan modifications, but your chances are worse than if you reach out early.
After connecting with the bank your mortgage is through, ask for the paperwork to apply for a loan modification. Many banks have a department that is dedicated to this process and will be very helpful in your journey to keep your home. This might seem a little strange as lots of homeowners view banks as evil and greedy. The truth is, they are a little, but they don’t want your home. Once a bank acquires a home through the foreclosure process, they have to get rid of it via auction. This is expensive, time consuming, and is way worse than if they had worked out a deal with you and your loan. Hence, they want you to be able to pay off your mortgage every month for the next 20 to 30 years just as much as you want to keep your house and keep making payments.
How to Get Approved for a Loan Modification
In order to get approved there’s usually three requirements you have to meet. The house needs to be your primary residence (not used for rental income or your business). You’ll need to show you have a steady income and can make the new payments under the modification. Finally, you’ll need to be able to show that you’re going through financial hardship. This can be satisfied by providing divorce paperwork, either you or your spouse losing your job or having to recently take a lower paying job. As long as you can provide these three things, a loan modification is a possible solution!
Once they send you their loan modification paperwork, there’s two options. One is to fill out the paperwork yourself using their guidance and instructions provided (along with some help from google). The other option is to reach out to a loan modification company to help through the process. Many people don’t recommend hiring a loan modification specialist as the paperwork is not that complicated and the time-consuming part is still on you which is gathering the required paperwork to complete the application.
The list of required documents can sound intimidating but is short. You’ll usually be asked for bank statements, tax returns, pay stubs (or profit/loss if self-employed), an income and expense worksheet and a hardship statement or affidavit. There’s also usually a form to fill out that involves personal information, mortgage information, property information and anything else the bank might need to make a decision on your loan modification.
The bank or lender will make a decision based on how much money you have after all of your other expenses, if you have any money reserved or saved anywhere, and some other debt to income ratios. There are no magic numbers and no public way to tell if they’re going to approve you. Each bank has their own internal guidelines and list of exceptions to the rules. Just because you think your debt to income is high doesn’t mean that the bank will immediately reject you. Your new monthly payments might put you in a good and stable financial position and if the bank can convince themselves that you’ll keep paying with this new structure they’ll approve you!
There are some things you can do in order to make sure the process goes smoothly.
When providing paperwork make sure that any numbered pages (page 1 of 5) contain each page. Don’t omit a page because it wasn’t requested, or you don’t think it’s relevant. Leave that up to the bank that’s reviewing it.
Make sure any paperwork you fill out by hand is legible and well written. The last thing you want is your handwriting to cause an accidental rejection.
Make sure you understand what’s being asked for and about. Asking questions to the bank won’t give them a negative opinion on whether they should approve you. It’s to your advantage to make sure you understand exactly what’s being asked.
Stay in touch, but don’t harass them. It can be hard to find and strike this balance right when it’s the single most important thing in your life. Sending an email or phone call once a week is the standard practice until a decision is reached.
A quick note, there are a lot of scams that involve people going through the foreclosure process. Be careful with anyone that asks for money upfront in order to help out with your situation. Google anyone that offers you help that isn’t directly with the bank that owns your mortgage.
Depending on what type of mortgage you have, there may be an existing loan modification program available, one that doesn’t require working one-on-one with your bank.
If you have a Fannie Mae or Freddie Mac mortgage, you should look into their flex modification programs. FHA loans have their own current temporary forbearance from the CARES act for up to 360 days.
When you first contact your bank to start the loan modification application, they should bring up any and all modification programs they already have. This will ease the amount of work both you and they have to do in order to figure out if the original loan can be changed.
Need help? Our company strives to provide fast solutions for homeowners in need or experiencing financial hardship. Let us help put your mind at ease and make your situation more comfortable. Contact us to discuss options for your property!