If you're 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, in many cases, you can apply for and (hopefully) get a loan modification on your own without paying for assistance. Though, sometimes, you might need the help of an attorney.
Read on to learn more about how loan modifications work, how to apply for a modification, and how you can navigate the process.
"Loss mitigation" is what the mortgage-servicing business calls the process where borrowers and their 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. But some programs under the Hardest Hit Fund 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 like 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.
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.
One of the federal mortgage servicing laws that went into effect on January 10, 2014 requires “continuity of contact” to help homeowners seeking a foreclosure alternative. Under the continuity of contact law, the servicer must assign a single person or a team of personnel to help you. However, the continuity of contact rule does not apply in certain situations, like if the servicer qualifies as a small servicer, or to some kinds of loans, like reverse mortgages and open-end lines of credit.
Additionally, the Homeowner Bill of Rights in California, Colorado, and Nevada also requires 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:
While it's sometimes useful to hire an attorney to help you in the modification process, in almost all circumstances you should avoid loan modification companies. Here's why.
You'll save money. Loan modification companies charge a lot for services you can perform yourself. Usually these companies do little more than act as a middleman between you and your servicer in the modification process. They gather up your paperwork and send it the the servicer. 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. For example, if the servicer violates the law, an attorney might be able to use this as leverage to get your loan modified. 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're 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.)