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 (hopefully) get 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.
"Loss mitigation" is what the mortgage business calls the process where borrowers and their loan servicer (on behalf of the loan owner) work together to prevent a foreclosure. The various loss mitigation options include a loan modification, forbearance agreement, repayment plan, short sale, and deed in lieu of foreclosure.
Perhaps the most sought-after form of loss mitigation is a loan modification.
A loan modification is a written agreement that permanently changes the original terms of the promissory note to make the borrower's mortgage payments more affordable. To reduce the monthly payment amount, the modification typically lowers the interest rate and extends the term of the loan. The modification also normally adds any past-due amounts to the unpaid principal balance as part of the deal.
Generally, loan owners don't like to approve first-mortgage principal reductions as part of a loan modification. However, some programs under the Hardest Hit Fund, like Keep Your Home California, combine principal reduction assistance with loan modifications.
Depending on your situation and circumstances, there are several different loan modification programs you might qualify for, including:
During the mortgage crisis, loan servicers commonly committed egregious servicing errors such as failing to handle loss mitigation applications appropriately. 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).
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:
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.
So, if you want a loan modification, it's easier than ever to navigate the process on your own because the loss mitigation process is much better regulated and structured than it used to be.
One of the big problems in the past was that homeowners who called their servicer 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.
As mentioned above, on January 10, 2014, 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 open-end lines of credit, reverse mortgages, qualified lenders under the Farm Credit System, any loan that is secured by a property that is not the borrower’s principal residence, and small servicers and certain government agencies.)
Additionally, the Homeowner Bill of Rights in California, Colorado, 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.
If you want to apply for 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.
To get a loan modification, you’ll need to submit an application to your mortgage servicer. Often you’ll need to provide:
In most cases, you're 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's much cheaper handle the loan modification process yourself rather than paying someone else to do the paperwork for you.
Scams abound. The majority of loan modification companies are scams. They'll take your money and you’ll get very little in return, certainly nothing that you couldn’t have done yourself. These companies might tell you they are experts at negotiating a loan modification, but there's really no trick to getting a modification. There's very little negotiating that occurs in the process—the loan owner has certain requirements that borrowers must meet in order to get a modification, and if you meet them, you'll get one. (In some cases, though, it's a good idea to hire an attorney to help you with the modification process. Learn more in Nolo's article Should I Hire a Lawyer to Help My Mortgage Modification?)
Efficiency in responding to inquiries. If you work on the modification process yourself, you can respond to any inquiries or requests from the servicer in a timely manner. Loan modification companies often fail to respond to requests from the servicer, which can lead to the 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.
If you find that you are having difficulty understanding what you need to do to complete your application or are having problems dealing with your servicer, rather than hiring a loan modification company, consider talking to an attorney or a HUD-approved housing counselor. (Learn about using a HUD-approved housing counselor.)