How to Fend off Foreclosure By Applying for Loan Modification
Last Updated April 10, 2009
Update: the final details of the loan modification program can be found here.
Loan Modifications are not a given for homeowners facing foreclosure. They are time consuming and they take their own time, sometimes up to 120 days. You don't need a mortgage professional - you can do the work yourself. There are some government programs in place designed to help homeowners. We'll try to take you through the whole process, though, we'll give you warning now, this is not an exact science.
Do I Qualify For a Loan Modification?
We've put together the most common requirements for a loan modification. If you fall into most of these categories you'll most likely qualify.
You must be falling behind on your mortgage
It seems obvious, doesn't it? But we hear it all the time, "I want to restructure my loan because the payments are just too high". When we ask how far behind on payments they are, the person may says they are not behind, but he or she wants to take advantage of the programs out there. Sorry. This is about HARDSHIP. You're not going to give out a vibe of hardship if you are current on your payments. And if you can make your payments, don't just stop making them to get a loan. It's an unfair world out there; tough it out.
You Must Have a Valid Hardship Reason
Just as the most common reasons for people filing bankruptcy are outside of their control, so too are reasons for people experiencing a hardship situation leading to foreclosure. Valid reasons for hardship are:
- Medical Emergencies
- Loss of Job
- Divorce
You Have an Adjustable Rate Mortgage
Ok, you made a mistake by getting into one of these things. Now it could potentially work in your favor. Adjustable rate mortgages pose the highest risks for mortgage foreclosure.
You Have a Mortgage Rate Above 8%
This kind of rate identifies your mortgage as being a sub-prime loan, which has a very high risk of default in today's environment. Again, although you may be having a tough time making your payment, having this kind of loan can work in your favor when applying for a loan modification.
You Are Unable to Refinance Your Existing Mortgages
Since you refinanced or purchased your home, you may have suffered a financial setback. Although you've been able to make mortgage payments, you may not have been able to make the payments on your credit cards. Your credit is in the toilet as a result, and there is no way you can qualify for a new mortgage. Keep any documentation of your failed refinance applications, and have them ready to be sent in with your hardship letter.
You're Upside Down on Your Home Value
Owing more than your home is worth is another huge risk factor for foreclosure. This means you have more to gain by walking away from your home than staying in it, so banks want to ensure you keep paying your mortgage and they don’t foreclose on your home.
OK, I think I Qualify, Now What?
The first thing to do is call your bank’s loss mitigation department. This is the department at your bank responsible if your home goes under foreclosure. They will ask you a series of questions to see if they think they can do the loan modification. Be prepared for questions about debt, credit and income. It would be good to have at your finger tips (get these numbers together before you call):
- Total Credit Card Debt (add up your card debt)
- Total Credit Ratios (total credit card limits available divided by the amount used)
- Any other loans besides credit cards and mortgages or equity lines, like auto loans.
- Total amount of your mortgage
- Total amount of any equity Lines
- Yearly Income
- Have a payment in mind that you think you could live with. If you want some help with calculations, you can use our calculators.
If the mortgage company thinks they can work with you, they will tell you so at this point. If not, well, at least you tried. If you get the green light, it's time to start gathering up your documentation to send in.
Gather Up Thy Documents, Matey
The documentation needed to get things rolling are almost identical to applying for a regular mortgage. Documentation on your diet, bills of sale to your first born...ok, you know we're kidding about these, but the paperwork for any kind of loan these days is staggering. Here's a list of what you'll really need. If you don't have an item, don't panic, but get together as many items as you can.
- Mortgage Statement (most recent for 1st and 2nd)
- Property Tax Statement (most recent)
- Homeowners Insurance Statement (most recent)
- Flood/Wind/Earthquake Insurance Statement (most recent)
- Car Loan Statement (most recent)
- Car Insurance Statement (most recent)
- Other Loan Statements (most recent)
- Credit Card Statements (most recent)
- Utility Bills (most recent water/sewage, gas/oil, telephone)
- Cell Phone Statement (most recent)
- Medical/Dental/Life Insurance Statement (most recent)
- Medical Expense Statement (most recent not covered by insurance)
- School Tuition and/or Child Care Statement (most recent)
- Bank Statements (for the last 4 periods)
- Tax Returns (for the last 2 years)
- W2s (for the last 2 years)
- Pay Stubs (for the last 4 pay periods)
- Hardship Documents supporting your hardship** (birth certificate, death certificate, medical bills, divorce papers, bankruptcy papers, etc.)
**The Hardship Letter is a document that must be created in your own words. Basically you want to get across to the bank that you did experience a hardship but are looking to resolve the situation with their help. I would also include if you saved any money that you are willing to put that towards a good faith deposit. Also include the new mortgage payment you can afford. Here is a good example of a good hardship letter.
Mail In Your Documentation, Per Instructions
The Loan Loss Mitigation Dept will give you instructions on where and how to send in your paperwork. It would be a good idea to send the letter certified, you don't want that kind of personal information just floating about. If you can drop off the paperwork to your bank, all the better. If you do mail in the documentation, make sure you follow up with a phone call to verify they received it.
Get Ready to be Proactive, yet Patient
Hounding the mortgage company isn't going to help. As you can imagine, they are probably overwhelmed with applications. On the other hand, not returning phone calls or being uncooperative isn't going to grease the wheels either. A weekly follow up call politely asking for status is perfectly acceptable.
For more details on the Making Homes Affordable program, go to this website: http://www.makinghomeaffordable.gov.
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