Loan Modification FAQ

What is a Loan Modification?

A Loan Modification is where your existing lender agrees, through a series of negotiations and paperwork, to change the terms of your loan so that you will have an affordable payment.

Why would the bank want to modify your loan?

The banks are looking to maximize their revenue, profits and image. In addition, the government is putting pressure on banking institutions to perform loan modifications.

• Banks are looking to maximize their profits or minimize their losses. They will compare all the options available to them and see if it makes financial sense for them to modify your loan. Foreclosure is definitely the worst option.
  • According to mortgage financier Freddie Mac, the typical foreclosure cost is nearly $60,000. And officials at HSBC North America, say their average loss on sale at foreclosure is 20 percent to 25 percent of the loan’s value.
    “We truly believe that foreclosure is the worst alternative for all parties concerned and go to great lengths to avoid foreclosure,” Brendan McDonagh, CEO of Illinois-based HSBC Finance, said in March testimony to Congress. “Financially, it is our worst alternative.”
• Foreclosures uproot homeowners, cause home valuations to drop, local economies to decline and so on. Banks must optimize their image. They are under increasing pressure from the media to modify your loan.
  One example comes to mind. This homeowner proceeded to do the loan modification by herself and was put off by the bank for many weeks. She decided to call a state sponsored organization that got her the loan modification approval back in 2 days. They threatened media exposure. Image protection can get you a loan modification approved or, on the other hand some bad PR can push a bank to close its doors. Remember what happened to IndyMac after some bad media exposure? IndyMac filed for bankruptcy.
• Banks are under increasing pressure from state and federal agencies to perform loan modifications. For example: Bank of America settled with state regulators recently to provide affordable loan terms to more than 400,000 homeowners nationwide.

Who is a potential candidate for a loan modification?

The loan modification is increasing with popularity with banks, the government and especially the homeowner. The exciting part is that guidelines are increasing to include more homeowners. At the moment, there are a couple requirements to be considered for a loan modification:

• You must have a verifiable source of income. The key word is verifiable. The bank will ask you for documents to substantiate your income. Pay stubs, income tax returns, w2’s and bank statements just to name a couple.
• The loan modification is being done for your primary residence not an investment property. Although, as I am writing this banks are becoming more lenient to provide a loan modification for an investment property.
• There has been a reduction in your income or an increase in your expenses do to a hardship. A hardship could be a divorce, sickness, death, job loss, medical bills, or a birth. A common hardship, among homeowners is an adjustment in your rate which in turn would cause your mortgage payment to increase.

There is one exception to the requirements stated above. You were a victim of mortgage fraud. The bank may be compelled to perform a loan modification without the requirements stated above. (To learn more about mortgage fraud, check our homeowner respurces section for more information.)

How long does a loan modification take?

One can expect to have a modification completed within a 30 to 60 day period.

What can I expect from a loan modification?

Expectation is contingent on experience. Depending on the service you intend to use, you may get different results. As an organization gains more experience, there tends to be more favorable loan modification terms. On the other hand, homeowners can apply and complete one without any paid assistance. The practical guide to processing your own loan modification is a good start. Whichever your path, expectations can include the following.

• Lowered monthly payments
• Interest rates from 2.5% - 6.5%
• 30 yr fixed terms
• Reduced principle balance
• Partially or completely deferred past payments
• Credit preservation
• Home ownership preservation

What are the typical myths behind the loan modification process?

Myth: You have to be behind on your mortgage payments to qualify.
Reality: Depending on your bank guidelines you may be able to perform a loan modification without being late. Example: Linton Loan Servicing

Myth:Banks will do everything to help struggling homeowners.
Reality: Banks have their own agenda. This means they will always try to minimize their losses and maximize their gains. Your loan modification terms will reflect their agenda.

Myth: I can make one call and get my loan modified.
Reality: It takes many months of persistent calling, negotiating, and reminding. Employees are underpaid and overworked. Loss mitigators often are handling up to 800 files at once.

Myth:I can hire someone to perform my loan modification for free.
Reality: Anything is possible. There are organizations out there willing to HELP you complete portions of the process. If you are paying for a loan modification service, be mindful of the quote “Buyer Beware”. If you are getting the service for free, I’ll suggest the following quote: “You get what you pay for”.

What should I do now?

You have two options. Perform the loan modification yourself or hire a professional organization to act on your behalf. Anyone can call the bank, fill out the loan modification package and send it in. But consider the following questions:

• What would you do if, your loan modification takes 5 months?
• What would you do if, the bank said they lost your file?
• What would you do if, they deny your loan modification?
• What would you do if, your house is set for auction in 2 weeks?

There are a lot of “if” questions and equally as many interesting facts. Consider the following points:

• Attorneys tend to get better results.
• A forensic mortgage audit can compel a bank to lower your mortgage payment.
• Certain investors holding your note will perform a loan modification.
• Upper level management at loss mitigation can be contacted for a loan modification.

To answer the question, What should I do now? Simply put, for your own sake, make a decision and ACT NOW.