What is a loan modification?
Changing the terms of a loan to prevent foreclosure.
Who qualifies for a loan modification?
1. The HAMP (Home Affordable Modification Program) program has its own qualification standards which we will review your situation in light of, and each lender typically has their own internal programs as well, these guidelines and standards change from time to time. If you are having trouble either now or in the future with your mortgage payment you need to speak to your lender.
What types of modifications are available?
This depends on a variety of factors including who your lender is, your current loan terms, whether there are violations of lending laws, whether your home is worth less than the loan, the nature of any financial hardship, and how much you can afford. The possibilities include lowering your interest rate, giving you a 30-year, or 40-year fixed rate, reducing your loan balance, deferring back payments to the back side of the loan, etc.
How do I meet the hardship requirement for a loan modification?
You must prove a hardship that makes it impossible to continue making loan payments. A hardship is the result of a circumstance beyond your control that forced you into a position where you can no longer afford loan payments. Some examples of hardship include but are not limited to:
a. Unemployment or loss of a primary income source
b. Inability to work due to health crisis
c. Mounting medical expenses
d. Employment relocation
e. Business failure
f. Bankruptcy
g. Death of spouse or significant other
h. Divorce or separation
i. You must move from your home
The severity of the hardship required depends on how many of the loan modification requirements set forth above are met. For instance, if your loan documents indicate predatory practices, no hardship is required. If your loan is higher than the value of your home, little hardship is required.
What if I am not experiencing a personal financial hardship? It’s really my loan and the value of my home that creates the hardship.
For many people these days, their loans have adjusted up so rapidly that it doesn’t make sense to pay such high loan payments for a property that has declined so much in value. For some lenders, these factors alone spell sufficient hardship to qualify for a loan modification, especially if you are in default on your loan.
What if I have assets?
Most lenders do not consider your asset-based status. They generally just look at your debt to income ratio, but they will ask for bank statements.
Do I have to be in default on my loan?
Some lenders no longer require you to be in default on payments to consider a loan modification. However, they must be convinced that you will soon default if they do not agree to a modification. It can be challenging to convince your lender that you will default tomorrow if you have not defaulted in the past. This requirement is changing with time. The FHA just announced (January 2010), that they are changing their requirements that a homeowner be 60 days late.
What is the objective of a loan modification?
To modify the loan to make it a performing asset and thereby avoid foreclosure for the lender and the borrower. It is the only true win-win answer. Never before has the home owner been in such an advantageous bargaining position with their lender.
What are the chances of getting my loan principal reduced?
If your home is worth less than the loan, it may be possible to reduce the loan to 90% of the value of your home under the Hope for Homeowners Act (Hope Program). The qualification list is quite lengthy. If you qualify, you must agree to share the property’s appreciation with the government. There may also be other circumstances which position you for a principal reduction, but please be aware that while we have obtained principal reduction for our clients, the majority do not receive principal reductions.
Can I get a loan modification if my credit is bad?
Loan modifications are not based on your credit like a typical refinance. Loan modification is a process to cut foreclosure loss to the lender. While you now have to meet stringent standards to obtain a new loan or refinance, loan modification standards are entirely different. The sole focus is ‘how can we modify this loan so this person can make loan payments, provide income to the bank and save the bank from losing money from foreclosure?” Your credit score is not an issue here; your ability to repay is. However, your lender may run your credit report to see your other debts and the status of those debts.
What if I am in California or another state that requires lenders to modify loans before commencing foreclosure?
As of September 8, 2008 in California (and in other states that have foreclosure reform laws – Google your state and ‘foreclosure reform law’), if your loan originated between 2003 and the end of 2007 and is secured by your principal residence, before your lender can record a Notice of Default, they must offer to modify the terms of your loan. This is an ideal opportunity to modify loan terms into a loan that works for you long term. We highly suggest you engage an attorney to assist you with this process.
What is a forensic audit review?
A forensic audit review is an attorney reviewed audit of your loan documents and the circumstances surrounding your loan(s) to determine if your lender violated lending laws when they made the loan to you. The legal terminology for this is engaging in predatory lending practices. According to some sources, violations are found in a majority of primary residence refinances and many purchases originated between 2003 and the end of 2007. If violations are found they permit you or your lawyer to immediately issue a violation letter to your lender which must be acknowledged in 20 days. According to some a violation letter may give you leverage in negotiating a loan modification or short sale, however our experience has shown this is largely unproven, as a result we do not offer forensic loan audits at our law firm, but if you have a review you had someone else complete we will review the findings and counsel you on your available options depending on errors and violations, if any.
How will a loan modification my credit?
It will not affect your credit unless you have been late on payments.
When Should I begin the Loan Modification process?
As soon as you understand that you will have difficulty making your payments. You do not have to be in default on payments. The sooner you can begin the negotiations with your lender, the greater the chances of a successful loan modification.
How Long Does Loan Modfication Generally Take?
It can be as little as a couple months, to as long as a year or more. That’s why it is important to begin the process as soon as you know you are challenged.
Can the process be expedited if I am facing foreclosure or an auction date has been set?
If you are imminently facing foreclosure or even if an auction date has already been set, the process can be expedited, but it is difficult. But, why wait this long and deal with the resulting stress. Be proactive. Don’t wait until the last minute.