Home loan modifications are a relatively new phenomenon. Until recently no one would have dreamed of asking the bank to change the terms on a loan. But given the cost of the alternative, the vast number of distressed borrowers, and the government incentives offered, banks today are not only considering it, they are doing it for homeowners everyday.
Understand Loan Modifications
In order to understand loan modifications borrowers must get familiar with the terminology used by lenders and servicers. It’s important to understand that every mortgage lender has different policies and procedures; where loan modifications are concerned, there is no standard process. That said, there are many elements that are the same from lender to lender.
Regardless of what the lender requests, it is important to document everything. Keep a log. Record every conversation. Include the names of every person involved and list every document submitted. Keep fax receipts and copies of items sent via certified mail.
Prepare to Make a Loan Modification Request
While the document requirements vary from lender to lender, borrowers should be prepared with the following:
- Primary hardship letter
- Tow months of bank statements
- To years of tax returns
- Current mortgage statement and documentation
- Documents proving hardship
- Financial statements
- Explanation of credit report deficiencies
- Copies of monthly bills
- Comparative market analysis or broker price opinion
- Title report showing all liens against the property
- Proof of homeowner’s insurance
- Copy of current credit report
- Escrow analysis that breaks payments down to principal, interest, taxes, insurance, PMI, etc.
Explain Issues In the Credit Profile
Homeowners should review a copy of their credit reports from each of the reporting agencies prior to contacting the lender or servicer. Errors should be corrected if possible and a detailed explanation of any delinquencies or deficiencies should be written. If a repayment agreement is set up with a creditor, copies should be included with documents forwarded to the mortgage lender or servicer. This information will help the lender or servicer to get a clear picture of the borrower’s financial situation.
Determine if Predatory Lending or Illegal Lending Practices Were Involved
Many of the so-called predatory lenders are making loan modifications these days. The reason is that they are in trouble and they know it. Evaluating a loan for violations or fraud takes an expert. A competent attorney can review the documents and determine very quickly if there was a violation or fraud. At that point homeowners should contact the appropriate government agency to file the complaint.
Draft the Hardship Letter
Hardship letters should state, in detail, the particular hardship that has made a loan modification necessary. Providing supporting documentation in the way of dismissal letters, decreasing pay stubs, receipts for additional expenses, etc. can help the lender to get a clear picture of the situation.
Contact the Lender
Once the proper documentation is compiled it is time to contact the lender or mortgage loan servicing company. Have the loan number, property address, and social security number available. Ask to speak with the department that handles loan modifications. Lenders typically take a preliminary expense and income listing and request that budget information be sent along with whatever paperwork they require. Initial contact should be made by phone and should be recorded in a log that is kept with all of the paperwork.
Negotiate the Loan Modification Terms
A mortgage is a contract between the borrower and lender. Terms were negotiated prior to drawing up the contract. Modifications to that contract are a negotiation as well. The lender will want the terms to be kept as close to the original terms as possible. Homeowners need to state clearly what terms they need in order to honor the terms of the loan. Agreeing to terms that cannot be met is not good for the lender or the borrower. It is important, however for borrowers to be realistic in their expectations of the lender. If the initial offer is too high, its okay to ask for a longer repayment term. Just don’t expect lenders to go back and forth with multiple offers. Additionally, an important part of the negotiation is showing good faith. That means being available to field phone calls, providing all requested documentation and responding on a timely basis.
Sign the Agreements
It’s not over ’til the documents are signed. Once the modification has been completed, sign where needed and file properly executed documents in a safe place. Take care to return the documents to the lender before deadlines expire or risk losing the modification before it goes into place.
After the loan modification has been completed borrowers should focus on keeping the loan current and managing other credit so they are well positioned for the future.