Home Loan Modification
About
About Home Loan Modification
A mortgage loan modification might be right for you if you’re facing financial hardships and can’t afford part or all of your monthly mortgage payment. A loan modification is a change made to the original terms of a mortgage loan agreement. This change can include a reduction in the interest rate, an extension of the loan term, or a change in the principal balance.
Loan modifications are often sought by homeowners struggling to make their mortgage payments and are at risk of defaulting on their loans. It can make the monthly payments more affordable and help the borrower avoid foreclosure.
If you're looking for help or advice on avoiding foreclosure, contact the Louisiana Housing Corporation online or by phone at 225-763-8700 and ask about the Foreclosure Prevention Program.
What You Need To Know
A mortgage loan modification is a specific financial arrangement made to modify the terms of an existing mortgage loan. When you apply for a loan, the contract outlines your monthly payments and terms. A modification is any change made to a mortgage loan. A loan modification is a written agreement that permanently changes the promissory note’s original terms to make the borrower’s mortgage payments more affordable. It involves changes to the interest rate, loan terms, or principal balance to lower the monthly mortgage payment. The primary goal is to make the loan more affordable for the borrower, particularly when they are struggling to meet their mortgage payments.
Federal laws regulate loan services and foreclosure procedures. Specifically, 12 C.F.R. § 1024.41 states that a servicer can’t initiate foreclosure unless the borrower is over 120 days past due on their mortgage payments. Before the foreclosure can even happen, your bank or lender must send you a breach letter informing you that your loan went into default. They must also include information about how you can resolve the issue, including options for modifying your mortgage.
Even if a borrower is more than 120 days delinquent, if that borrower submits a complete loss mitigation application before the servicer makes the first notice or filing required to initiate a foreclosure process, the servicer can't start the foreclosure process unless:
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the servicer informs the borrower that the borrower is not eligible for any loss mitigation option, and any appeal has been exhausted
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the borrower rejects all loss mitigation offers, or the borrower fails to comply with the terms of a loss mitigation option such as a trial modification. (12 C.F.R. § 1024.41).
You must submit your application to the lender at least 45 days before the scheduled foreclosure sale of your home. Your lender must approve the new terms of the contract, and you can’t miss additional payments.
To qualify for most modification programs, you can either be in default or show that you're in danger of falling behind, called "imminent default." But you don't have to actually go into default to qualify.
You have multiple options for modifying your loan, so you don’t face foreclosure and lose your home. These options include:
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Lower interest rates – You might be eligible for a lower interest rate if you have enough equity in your home. If you refinance your mortgage with a lower interest rate, you can reduce the amount of your payments.
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Principal reduction – You could also decrease your monthly payments by reducing the remaining principal on your mortgage.
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Switch from adjustable to fixed rates – Many people choose adjustable-rate mortgages when they first apply for a loan. It seems like the better option because of the low interest rates and payments. However, these interest rates often increase over time, leaving the borrower unable to afford their payments. If you refinance or convert your mortgage to a fixed-rate mortgage, your monthly payments might be more manageable.
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Extended loan terms – You could negotiate with the lender to extend the term of your loan. Spreading out your unpaid balance over a longer payment period could reduce your monthly payments. However, you’ll likely also pay higher interest rates and more money over the life of the loan.
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Postpone payments – You could temporarily defer or postpone your mortgage payments if you or someone in your family faces temporary hardships, such as a medical emergency, temporary disability, unemployment, or requirement to serve military duties.
Depending on your mortgage type and circumstances, you might qualify for a government modification program. Different options are available for borrowers with Fannie Mae, Freddie Mac, FHA-insured, VA-guaranteed, and USDA mortgages.
For instance, you might qualify for a Fannie Mae or Freddie Mac Flex Modification if you have one of those kinds of loans. To find out if either Fannie Mae or Freddie Mac owns your loan, call your mortgage servicer or use the Fannie Mae and Freddie Mac online loan lookup tools.
- Conventional loan modification – For conventional mortgages owned by Fannie or Freddie, you can pursue the Flex Modification program, which can reduce monthly payments by up to 20 percent, extend the loan term up to 40 years, and potentially lower the interest rate.
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FHA loan modification – There are a few options for an FHA loan modification, including an interest-free loan for up to 30 percent of your balance.
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VA loan modification – If you have a VA loan, you can roll the missed payments back into the loan balance and work with your lender to come up with a new, more manageable repayment schedule. Another option might be extending the loan term.
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USDA loan modification – With a USDA loan, you can modify your mortgage with an extended term of up to 40 years, reduce the interest rate, and receive a “mortgage recovery advance,” a one-time payment to bring the loan current.
While it's sometimes useful to hire an attorney to help you in the modification process, you should avoid loan modification companies in almost all circumstances.
Loan modification companies charge a lot for services you can perform yourself. Modification companies collect your application paperwork from you and send it to your mortgage servicer. These companies charge thousands of dollars to act as a middleman.
It's much cheaper to handle the modification process yourself instead of paying someone else to do the legwork for you. Also, many modification companies are scammers who will do little or nothing to help you in the process.
For more information, see Finding and Hiring a Lawyer.
In some circumstances, getting an attorney to help you in the modification process is worthwhile. For instance, if you're having difficulty understanding what you need to do to complete your application, the servicer violates loss mitigation laws, or your servicer isn't responding to you, you might want to talk to a lawyer. For more information, see Finding and Hiring a Lawyer.
If you can't afford a lawyer, a legal aid organization or HUD-approved housing counselor might be able to help you for free. But don't hire a loan modification company.
How To Get A Home Loan Modification
About How To Get A Home Loan Modification
Obtaining a home loan modification can be a valuable financial strategy to lower your mortgage payments and prevent foreclosure. Eligibility and specific terms for a home loan modification can vary depending on your lender and the government programs available.
Understand that the loan modification process can be time-consuming, and it may take several months to reach a resolution.
Continue making your regular mortgage payments until the modification is approved. Falling behind during the application process can complicate matters.
This is a summary of the steps involved in getting a home loan modification.
If you're looking for help or advice on avoiding foreclosure, contact the Louisiana Housing Corporation online or by phone at 225-763-8700 and ask about the Foreclosure Prevention Program.
How To Get A Mortgage Loan Modification
Eligibility for a mortgage loan modification will vary, but it usually depends on being able to show the following three factors:
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The home on your mortgage is your primary residence;
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You’re experiencing financial hardship; and
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You have enough income to afford payments under the modified terms of the loan.
Different lenders and government programs may have specific eligibility requirements for loan modifications. Ensure that you meet these criteria before applying.
Reach out to your lender and explain your situation. Ask them if you can change the terms of your contract and provide your proposed adjustments. Usually, you must be delinquent on your payments or facing imminent default to qualify for a loan modification.
Keep open lines of communication with your lender throughout the process. Promptly respond to their requests for information and documentation.
You must prepare and then submit a completed loss mitigation application. Some lenders will also require documentation, such as:
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Income – Your source of income and how much you make
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Expenses – A list of your monthly expenses, including housing, transportation, food, and other costs
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Hardship letter – Detailed letter explaining why you can no longer afford your mortgage payments and your plan to resolve the issue
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IRS Form 4506-T – If you can’t provide your tax information to the lender, providing this form grants them access
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Documents – Proof of your financial standing, such as tax returns, loan statements, bank statements, and pay stubs
Writing a hardship letter for a home loan modification is a formal document that explains your financial difficulties and requests a modification of your mortgage terms. A well-written hardship letter can increase your chances of getting a favorable response from your lender. Here's a summary of the key points to include in such a letter:
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Contact Information: Begin with your name, address, phone number, and email address. Also, include the date at the top.
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Recipient Information: Address the letter to your lender, including the loan officer's name and contact details, if available.
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Introduction: Start with a polite salutation, such as "Dear [Lender's Name]." Express gratitude for the opportunity to explain your situation.
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Explanation of Hardship: Clearly state the reason for your financial hardship. Common reasons include job loss, reduced income, medical expenses, divorce, or other unforeseen circumstances.
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Details of the Situation: Provide specific details about your hardship, including dates, events, and how it has affected your ability to make mortgage payments. Use facts, not emotional language.
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Documentation: Enclose any supporting documentation, such as medical bills, layoff notices, divorce papers, or other evidence of your financial difficulties.
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Efforts to Address the Issue: Mention any actions you've taken to mitigate the situation, such as job searches, cost-cutting measures, or contacting credit counseling services.
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Request for Loan Modification: Clearly state what you're requesting, whether it's a lower interest rate, a longer loan term, or another modification that would make your mortgage payments more manageable.
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Proposed Solution: If you have specific ideas for the loan modification, mention them here. For example, you might propose a reduced interest rate or a temporary suspension of payments.
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Financial Information: Include a summary of your current financial situation, including income, expenses, and any assets. This helps the lender assess your ability to make modified payments.
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A Plan for the Future: Explain how the loan modification will help you get back on track and commit to making regular payments once the terms are adjusted.
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Closing: Express appreciation again for the lender's consideration. Use a formal closing, such as "Sincerely" or "Yours faithfully."
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Signature: Sign the letter by hand. A physical signature adds a personal touch to the communication.
Your lender will review your application and financial documents. They may offer a modification plan, which could include lower interest rates, extended loan terms, or a reduction in the principal balance.
Carefully review the terms of the proposed loan modification agreement. Ensure that you understand the new interest rate, monthly payments, and any other changes to the loan.
When obtaining a loan modification, confirm with your lender or servicer whether the modification is temporary or permanent, and what your new monthly payment will be. Always read the fine print, and ask questions if you’re unsure about the long-term implications of a modification.
Compare the total payments under your original loan to the total payments under the modified loan. What you don’t want is a temporary reduction only to find the reduced amount added back onto your mortgage balance and then have to pay interest on the larger balance.
Also, avoid any modifications that are interest-only and adjust to a higher rate, add unnecessary costs to your loan in the form of penalties, fees, or processing charges, or result in a large balloon payment due after a certain period. These types of modifications might only make sense if you plan to hang onto the home just long enough to sell it, in order to salvage your equity and credit.
Carefully read the modification agreement, ensuring that you understand the terms, including the new interest rate, monthly payments, and any other changes. Sign the agreement and return it to your lender.
Other Issues To Consider
Other Issues To Consider Related To Home Loan Modification
When seeking a home loan modification, there are several important issues to consider beyond qualifying and applying for a home loan modification.
If you're looking for help or advice on avoiding foreclosure, contact the Louisiana Housing Corporation online or by phone at 225-763-8700 and ask about the Foreclosure Prevention Program.
Other Issues To Consider
Be aware that a loan modification can have an impact on your credit score. While it's generally less damaging than foreclosure, it may still affect your credit. Discuss the potential impact with your lender and a financial advisor.
Explore whether you qualify for government programs such as the Home Affordable Modification Program (HAMP) or other local or federal assistance initiatives. These programs often have standardized procedures and guidelines.
Consult with a legal and tax professional to understand any legal or tax implications of a loan modification. For example, debt forgiveness in a modification might be considered taxable income.
Consider all your options before pursuing a loan modification. This could include refinancing, selling the property, or exploring other sources of financial assistance. Remember that each homeowner's situation is unique, and the best approach will depend on your specific circumstances.
Ensure that the modified loan terms are sustainable for your financial situation. You don't want to end up in the same situation shortly after the modification.
Periodically assess your financial situation and the terms of your modified loan to make sure it continues to meet your needs. If circumstances change, consider discussing further modifications.