If you are a struggling homeowner trying to avoid foreclosure, a loan modification that lowers your monthly mortgage payment might be the perfect solution for your situation. Even though the process might seem intimidating, you can apply for and obtain a loan modification on your own without paying for assistance. Read on to learn more about how loan modifications work, how to apply for a modification, and how you can navigate the process on your own.
What Is Loss Mitigation?
Loss mitigation in the mortgage business is a process where borrowers and their lender work together to prevent foreclosure. There are several different kinds of loss mitigation, such as:
- loan modifications
- forbearance agreements
- repayment plans
- short sales, and
- deeds in lieu of foreclosure.
(To get information about these and other options to avoid foreclosure, see our Alternatives to Foreclosure area.)
Perhaps the most sought-after form of loss mitigation is a loan modification.
Understanding Loan Modifications
A loan modification is a written agreement between the borrower and the lender that permanently changes the original terms of the promissory note to make the mortgage payments more affordable.
In certain situations, a lender can do one or more of the following things to get your monthly payment down to a level that you can afford:
- lower the interest rate
- lengthen the repayment term, or
- reduce the principal balance.
(Generally, lenders do not like to approve first-mortgage principal reductions as part of a loan modification. However, there are some programs under the Hardest Hit Fund, for example those in Arizona and California, which combine principal reduction assistance with loan modifications. For more information on the different Hardest Hit programs, visit our Hardest Hit Fund topic page.)
Different Loan Modification Programs
Depending on your situation and circumstances, there are several different loan modification programs you may qualify for, including:
- The government’s Home Affordable Modification Program (HAMP). (To learn about other government programs for distressed homeowners, visit Nolo's Government Foreclosure Prevention Programs area.)
- Fannie Mae and Freddie Mac’s Streamlined Modification Initiative.
- A proprietary (in-house) loan modification.
Loan Modification Problems During the Mortgage Crisis
During the mortgage crisis of the late 2000s, mortgage servicers commonly committed egregious servicing errors such as failing to handle loss mitigation applications appropriately. (A mortgage servicer is the company that collects monthly mortgage payments, tracks account balances, manages the escrow account, handles loss mitigation applications, and pursues foreclosure in the case of defaulted loans.)
(Read more about abuses by the mortgage servicing industry.)
Borrowers seeking loan modifications during this time almost always got the runaround from their mortgage servicer. It was next to impossible to talk to the same person more than once, paperwork got lost, and, worst of all, the servicer would keep the foreclosure moving forward while at the same time letting the borrower think that a loan modification was forthcoming (called dual tracking).
New Laws to Help Homeowners in the Loan Modification Process
As a result of the problems during the mortgage crisis, new rules and laws designed to protect homeowners in the loan modification process came about. For example:
- In late April of 2013, the Office of the Comptroller of the Currency issued minimum mortgage servicing standards to ensure that borrowers receive a pre-foreclosure sale review and that a loan modification is appropriately considered. Read more about Federal Standards For Mortgage Servicers Handling Imminent Foreclosures.
- On January 10, 2014, new mortgage servicing rules designed to protect borrowers when it comes to mortgage loans and loss mitigation went into effect. Read more about New Federal Rules Protecting Homeowners With Mortgages.
- California passed the Homeowner Bill of Rights, which regulates how mortgage servicers handle loan modification applications. (Nevada and Minnesota also passed similar laws.)
- The $25 billion national mortgage settlement restricts the nation’s five largest mortgage servicers (Bank of America, Citi, JPMorgan Chase, Wells Fargo, and Ally/GMAC) from dual tracking.
Now, servicers generally try to work with customers who are facing financial difficulties to keep them in their home if at all possible. They have increased their personnel and streamlined the process to better keep up with increased loan modification requests. If you want a loan modification, it is easier than ever to navigate the process on your own since the loss mitigation process is much better regulated and structured than it used to be.
Contact Your Servicer’s Loss Mitigation Department
If you want a loan modification, the first thing you should do is contact your servicer’s loss mitigation department (sometimes called a home retention department). You can typically find contact information on your monthly mortgage statement or on the mortgage servicer’s web page.
Single Point of Contact
One of the big problems in the past was that homeowners who called their lender to apply for a loan modification had to explain their circumstances repeatedly, often to several different representatives. Currently, in many instances, you’ll be assigned one person to work with you through the process who will explain each step along the way.
On January 10, 2014, new federal mortgage servicing rules went into effect. Among other things, one of the rules requires “continuity of contact” when a homeowner seeks foreclosure alternatives. Under the continuity of contact rule, the servicer must assign a single person or a team of personnel to help if you inquire about a way to avoid foreclosure. (The continuity of contact rule does not apply to HELOCs and other open-end lines of credit, reverse mortgages, loans for which the servicer is a qualified lender under the Farm Credit Act of 1971, any loan that is secured by a property that is not the borrower’s principal residence, and small servicers and certain government agencies.)
Also, the national mortgage settlement requires that the servicer appoint a single point of contact for homeowners who are potentially eligible for loan modifications or other foreclosure prevention alternatives.
Additionally, Making Home Affordable guidelines require the 20 largest servicers to appoint what they call “relationship managers” to serve as the homeowner’s single point of contact when being evaluated for a potential HAMP modification. The relationship manager is responsible for communicating and working with the borrower through the entire process. If the loan is later referred for foreclosure, the relationship manager must be available to respond to borrower inquiries regarding the status of the foreclosure. While these rules apply only to the largest servicers, the U.S. Treasury encouraged all participating mortgage servicers to adopt the new guidance for providing borrowers with a single point of contact, and most have agreed to do so.
The Homeowner Bill of Rights in California and Nevada also requires mortgage servicers to appoint a single point of contact (or team) if a homeowner requests a loan modification or other foreclosure prevention alternative. The single point of contact must remain assigned to the account until all loss mitigation options are exhausted or until the account is brought current.
The Loan Modification Application
To obtain a loan modification, you’ll need to submit an application to your mortgage servicer. Often you’ll need to provide:
- a completed application (including your personal information, mortgage information, property information, and so forth)
- recent paystubs (or a profit and loss statement if self-employed)
- bank statements
- tax returns
- income/expense financial worksheet, and
- a hardship letter or hardship affidavit.
Benefits of a Do-It-Yourself Loan Modification
In most cases, you are better off filling out the application and gathering the required documents on your own rather than hiring someone to assist you. Here's why.
Saves money. It is much cheaper to just do it yourself than paying an attorney or a loan modification company to do the paperwork for you. All it takes is a little effort on your part and you'll save a lot of money.
Scams abound. The majority of loan modification companies are scams. They will take your money and you’ll get very little in return, certainly nothing that you couldn’t have done yourself. These companies may tell you they are experts at negotiating a loan modification, but there is no trick to getting a loan modification. There is very little negotiating that occurs in the process. The lender has certain requirements that borrowers must meet in order to get a loan modification, and if you meet them, you will be given a modification.
(To learn about other common foreclosure scams, and how to avoid them, see our Foreclosure Rescue & Other Scams topic area.)
Efficiency in responding to inquiries. If you work on the loan modification process yourself, you can respond to any inquiries or requests from the mortgage servicer in a timely manner. Loan modification companies often fail to respond to requests from the loan servicer, which can lead to the loan modification request being denied. Also, you are in the best position to respond to any inquiries because only you know all of the details of your particular situation.
Getting Free Help
If you find that you are having difficulty with your application or need help in submitting your loan modification request, you can get free assistance from a HUD-approved housing counselor who will work with you and your mortgage servicer on your behalf.
Call 888-995-HOPE (4673) to speak with a counselor about your individual situation.