The 2008 subprime mortgage crisis and ensuing collapse of the housing bubble wreaked havoc on the American economy. While the situation has improved somewhat in recent months, not too long ago a Harris Poll found that that 22% of people with mortgages were struggling to make payments, including some 7% who were having “a great deal of difficulty”.

If you count yourself among the millions of Americans who are drowning in mortgage debt, you may be interested to know there is a solution that can help you avoid foreclosure, lower your payments and keep your home. It’s called a loan modification.

What Is a Loan Modification?

A loan modification is exactly what the name implies: It is a modification of your mortgage loan, either through an adjustment to your interest rate, a lengthening of your loan term or adjustments to other loan parameters, such as mortgage insurance, escrow, etc. By modifying any one or more of your loan parameters, your mortgage payment can once again be made affordable.

A Loan Modification Scenario

A starting loan balance of $200,000 amortized on a 30-year term at 8% would equate to a monthly principle + interest payment of $1,467.53. Let’s say the homeowner has already paid 5 years, always on-time and has a remaining balance of $189,939. Recently, a loss of income caused the homeowner to struggle financially. In this case, the bank might offer to lower the borrower’s interest rate to 4 percent, and stretch the remaining loan term back out to 30 years. In such a scenario, the new principle + interest payment would be just $906.80, or s monthly savings of approximately $560. For most Americans, this is not a trivial amount of money. This is just one example of how a loan modification might work, although there could be many others.

Be Careful

History has already shown that not all loan modifications are created equal. It is possible that your new loan might only postpone the inevitable if not done in a way that addresses the constraints of your financial situation. Indeed, this has been the case for many homeowners who had their loans modified, only to realize their new loan terms weren’t sufficient to keep them out of financial hot water yet again at a later point.

In response to this widespread phenomenon, the Obama Administration announced important enhancements to the Home Affordable Modification Program, also known as HAMP in February, 2012. These enhancements expanded the reach of the program to help homeowners in hard-hit communities to stay in their home.

Tips for Getting the Right Kind of Loan Modification

It’s not enough to get a loan modification. You must ensure that your new loan is not just a temporary solution.

Don’t put it off. Loan modifications were historically reserved for homeowners who had already defaulted on their loans, typically by 90 days or more. This is increasingly no longer the case at many financial institutions. While some loan servicers stipulate that borrowers be at least 30 days late, it is not always the case. Regardless of whether you are late, it is never too soon to contact your loan servicer or lender to find their requirements for a loan modification. One important fact: Federal assistance programs do not require that homeowners be in default before seeking help.

Should You Seek Professional Help?

Mortgage loans are inherently confusing for many people. Deciding whether or not to seek the help of a professional is not always an easy task. Should you seek the advice of an attorney? What about a nonprofit organization, or even a federally funded housing counseling agency? Do you have the time and knowledge to pursue a loan modification on your own? These are all good questions. And the answers may vary depending on your specific circumstances.

In general, it is wise to seek the help of a knowledgeable professional, although it is not always necessary, especially if you already have a good grasp of how mortgage loans work. Many HUD-approved counseling agencies can guide you through the process and don’t charge for their services.

In fact, the FTC recently issued a final rule to protect struggling homeowners from mortgage relief scams. Under the MARS Rule, “mortgage relief companies may not collect any fees until they have provided consumers with a written offer from their lender or servicer that the consumer decides is acceptable, and a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer. The companies also must remind consumers of their right to reject the offer without any charge.”

Spending a few thousand dollars on an attorney who specializes in these types of issues can be money well-spent if it ensures you don’t wind up with another bad loan. There is no shortage of loan-modification scams out there. Be sure to not disclose any bank-account information to any party other than your mortgage lender or servicer.

Find out Who Your Lender Is

Dealing directly with your lender is your best hope of getting the most flexible loan terms, since your lender doesn’t need anyone else’s approval. But in the modern mortgage era, where loans are so often sliced and diced, and then packaged into mortgage securities, it can be anything but obvious as to who owns your loan. The best way to find out who owns your loan is to ask your loan servicer. Your servicer’s number can typically be found on your payment coupons or monthly statements. You should also be able to find your servicer’s contact info online. Also, your lender may participate in the Making Home Affordable program. The purpose of the Making Home Affordable program is to help about 9 million American homeowners. While participation in this program is left to the loan servicer, most major servicers do participate in the program to some extent. An updated list of participating loan servicers and lenders can be found on the Making Home Affordable program website.

Don’t Bend the Truth

Once are in communication with your lender, and have begun the process of applying for a loan modification it will be necessary to gather some information and documentation. You lender needs to get an accurate picture of your financial situation in order to determine if a loan modification is right for you, and if so, how to structure the loan so that it best addresses your financial needs. People are sometimes tempted to fudge the numbers a bit, or exaggerate certain things in order to convince the lender that you should be approved for a loan modification. Or, some borrowers are embarrassed by some past mistake which led to the financial predicament in which they find themselves. Whatever the reason, it is unwise to misrepresent anything, no matter how small. It will be counter-productive in the end, and only slow things down.

Gather Your Documentation

Your lender will ask for supporting documentation, proving your income, expenses and other liabilities. It is a good idea to gather this documentation as soon as possible. Here are some examples of the types of documentation you will most likely need.

  • Income documents, such as your most recent paycheck stubs, showing your gross, monthly, pre-tax income, and any other gross income received.
  • Your most recent 1-2 years’ worth of tax returns, including all schedules.
  • Bank statements showing account balances.
  • Other financial statements showing the value of assets, such as stocks, bonds, annuities, etc.
  • Mortgage statements such as those for a second or third mortgage, home equity line of credit, etc.
  • Monthly credit card statements, showing all balances owed and payment information.
  • Other documents showing balances and payments on such obligations as car loans, student loans, etc.
  • A letter explaining what events and circumstances led to your financial predicament. Divorce, death in the family, job loss, and health problems are all examples of traumatic life events outside the borrower’s control.

How to Write a Hardship Letter

As mentioned, you will have to write a hardship letter describing what caused your current situation. The importance of this letter should not be underestimated, and as such, it should be very well written. A well written letter should stick to the facts, and present a timeline of events that coincide with the progression of the financial hardship. If after reading your letter the lender still can’t determine why you fell behind on your mortgage then they may suspect there is something more going on. So try to be as specific as possible, connecting the dots, so to speak, so your lender can see exactly how certain events coincided with, and directly contributed to, your current situation. One final tip: Stick only to the facts and be concise. A few paragraphs are easier to read and require less patience on the part of your lender compared to a 10-page letter.

Talk to the Right People

One of the most commonly cited problems among homeowners who had gone through the loan modification process is finding the right person to talk to. For anyone going at it alone, make sure you’re in the right department first and foremost. Talking to someone in collections, for example, will do no good when you really need to be talking to someone in your lender’s loss mitigation department. This may sound like common sense, but it is an easy thing to get wrong if you’re not specifically aware of it.

Don’t Set Your Sights Too High

It is a hard reality to accept, but you have very little control over the loan modification process, including the terms of your modified loan. Once you have presented all documentation necessary to make a determination, any offer to modify your loan is solely made at your lender’s discretion. This is not to say you have no influence whatsoever. But keep in mind that your lender’s goal is to make as much money over the lifetime of the loan as possible, while at the same time allowing you to stay in the home. This is most typically achieved by lower your interest rate, and possible extending the loan term. If the proposed, new loan is still too high, and you can present a convincing argument in support thereof, then don’t feel as though you must sign on to the new loan. In making your case, be sure to present specific details showing how the proposed loan still leave you financially vulnerable. Whether you are working with a professional or on your own, just present the crunched numbers and make a case for why a different payment would work better. Remember, foreclosure is expensive process and your lender would prefer not to get stuck with an empty home.

Stay Cool

For you, a loan modification is personal, since it affects your life. For your lender, it’s strictly business. Anger and frustration are understandable reactions when dealing with your lender. But while understandable, such behavior does not serve your best interests. Remember that the loan-modification officer you’re dealing with has feelings too, and probably deals with angry people all day long. You don’t want to give him or her any excuse to ‘accidentally’ lose some important document, or forget to accomplish some important task related to your loan modification. Even if you feel you have good cause to be upset it is important to stay cool and collected. If and when the time arrives to negotiate more flexible terms you will be glad you maintained good relations with your loan modification officer. It may sound like common sense, but it’s important to realize that people want to help people they perceive as nice.

Contact Your Congressman or Congresswoman

If your lender refuses to work with you or is giving you the runaround, consider enlisting the help of you congressman or congresswoman. Believe it or not, this is a tactic that can produce results when progress is being held back due to inaction or irresponsibility on the part of your lender. Politicians like to keep their constituents happy, and employ staff to assist in dealing with all manner of issues. Enlisting the help of your congress person should not be a first resort. But when all else fails, and an impasse has been reached, it is something worth trying.

Document Everything

Leaving a paper trail and documenting everything is wise should legal action be required at any future point. Keep all documentation sent to you by your lender. Make detailed notes as to whom you talked to and when. For example, “Spoke with Tom Smith, agent number 123, on June 30, 2012 at 3: 30 p.m.” Try to get your lender representative to send a recap of your conversation in an email message. By documenting everything, you can work with an attorney to build a case that you tried to work with your lender to find a solution should you face foreclosure at a later time. Plus, keeping track of everything and staying organized just makes life easier and helps you be efficient in your dealings with your lender. Whenever you need to mail anything to your lender, be sure to use some trackable means of deliver, such as certified mail, FedEx, UPS or even U.S. Postal Priority mail. This ensures you can prove that documents were received by your lender, and on what day/time. Sure, it costs more to send things this way, but in the end it is your best protection against your lender claiming to have never received something you sent.

Be Patient, Be Perseverant

When you are drowning financially patience can be hard to come by. It helps to realize from the start that most loan modifications can take as long as 90 days to complete. Your lender should be able to give you a ballpark idea as to how long yours should take, based on its own caseload and average processing time. If at first you are told “no” don’t be afraid to ask again, even if it means calling and asking to speak with someone else, perhaps a supervisor. People make mistakes, and it is possible if you were told “no”, that it was in error. It can take a certain amount of perseverance when dealing with a large organization, especially when the system is complex and has many moving parts. Be sure to get a timeline when you start the process. Understand the milestones that must be achieved, and then follow up accordingly, always adhering to deadlines as they arrive, especially when you have heard nothing from your lender.

Final thoughts

If there’s one thing about life you can be sure of it is that there will be adversity. How you handle adversity is what’s important. When facing any big challenge, it often helps to break it down into smaller, more manageable challenges—“baby steps” if you will. A loan modification is really nothing more than a series of small challenges that must be dealt with one by one. As an ancient poet once said, “A journey of a thousand miles begins with a single step.”

Mike Woods is a freelance author whose interests include technology, politics and business. He is also broker/owner of a central Indiana real estate website, msWoods.com.

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