John Vitela: Who Qualifies For A Loan Modification?

A loan modification is a complete re-structuring of your home mortgage. The lender who holds your home mortgage may agree to modify your home mortgage in one or more of the following ways:

• If you are behind on mortgage payments, they may add mortgage arrears to the end of the loan, or capitalize arrears into the balance of the loan.

• If your payments are too high, the Lender may decrease the amount of a monthly mortgage payment;

• The lender may reduce your interest rate which may also lower the monthly mortgage payment;

• Extend the term of a loan such as from 30 to 40 years to absorb the mortgage arrears and/or lower the mortgage payment.

• If your home is worth less than you owe on your loan, the Lender may possibly reduce the principal balance of a mortgage.

Although you can apply for a loan modification yourself you may need or want to retain the assistance of an attorney to help you. Utah Bankruptcy performed by Ascent Law LLC and its attorneys has assisted hundreds of individuals obtain loan modifications in all the ways discussed above (reduction in amount of mortgage payment and interest rate, adding arrears to end of loan, reducing principal balance, etc.). To succeed, it is important to present yourself and your financial picture in the most favorable and accurate light possible to increase the likelihood the Lender will approve your application for modification. It is also important to demonstrate that the loan modification benefits both you and the Lender. Utah Bankruptcy does affect your credit; but keep in mind that your attorney can assist you in knowing the consequences in preparing, organizing and evaluating documentation requested in applications for loan modifications. Ascent Law LLC has helped numerous individuals create the means of increasing income to their households to qualify for a loan modification. The Lenders are very demanding in their requirements that all requested documents are submitted with the application for loan modification. There are often multiple additional requests for documentation.

Document Communications and Submissions To The Mortgage Lender

The follow up and documentation of the application process is crucial. It is important to keep detailed conversation logs and notate each time any documentation is submitted, and then verify it was received within 2-3 days after submission (time needs to be allowed to have documentation loaded into their system). It is also important to review the documentation to ensure the lender will see that you will be able to make the payment once the modification is complete, without making it appear you can make the current payment without modification. It is important to review any offers to ensure they meet your needs.

Loan Owners Approve Or Deny Applications For Loan Modifications

Loan modifications are either approved or denied by the lender who owns your loan and its designated servicer. The lender’s designated servicer reviews the submitted paperwork and renders a decision based on the loan owners’ guidelines. To clarify, most mortgages today are owned by pension funds and investment groups, and serviced by banks and loan servicing companies. Many consumers falsely believe that major banks such as Wells Fargo and Bank of America own all the mortgage loans they service. The truth is that while they do own some of the loans, they act as a servicer for most loans. As a result, they are instructed by the owner of the note on what guidelines are to be used to determine whether a loan application is approved or denied. However, lenders have been pressured by the government to modify mortgages to assist homeowners, and in cases where the mortgage is owned by a government sponsored entity the lenders are directed to modify a mortgage payment equal to 32% of gross income, if reasonable. However, the government left the means to the Lender for determining income was left to the lender along with the definition of “if reasonable”, no timeline was given under which they had to review the modification documentation, and the 32% of gross income to mortgage payment was vague as they were not required to modify to the percentage, only asked to when reasonable.

Appealing Denials

Utah Bankruptcy Professionals has helped many individuals save their homes and lower their mortgage payments by appealing Lenders’ denials of applications for loan modifications. Many Utah homeowners are struggling to remain in their homes. In some instances, unemployment or other financial issues make it difficult to make mortgage payments. In other cases, falling home values have homeowners questioning the wisdom of paying more money toward a bloated mortgage. But a mortgage modification may solve your housing worries. Talk to a loan modification attorney to learn whether you qualify.

The Basics of Getting Your Home Loan Modified

When a lender approves a loan modification, it’s typically doing one of several things:

• Lowering the mortgage’s interest rate, particularly if the homeowner is locked into a high interest rate and ineligible to refinance the loan

• Forgiving some of the loan’s principal balance, particularly if the home is “under water,” or worth less than the value of the loan

• Extending the length of the loan

• Waiving some of the penalties and late fees that have accrued, particularly if the homeowner is facing financial issues—such as unemployment, divorce or medical issues that make it difficult to make the full loan payments in a timely manner.

Loan modification risks

Loan modifications are changes made to an existing loan’s terms beyond the specifications of the original agreement. With mortgages, loan modifications are often used to help homeowners catch up on their obligations and avoid foreclosure. Examples include:

• Reducing the interest rate

• Reduce the amount of the principal

• Extend the terms of the loan

• Apply a cap to monthly payments

• Home saver advances

Here’s a typical example. You’re struggling to make your mortgage payments, so you’ve approached the lender to obtain a mortgage loan modification. The bank representative has suggested that you seem to qualify and are presently under review for a modification approval. Then one day you receive a Notice of Default and realize you are now in foreclosure. Whatever happened to the loan modification you were practically promised? For loan modifications, this can be problematic because lenders never actually sign these documents. They simply send out the paperwork and express willingness to honor the modification until they suddenly and unilaterally terminate it – which they can, because they never signed it. In the meantime, unwary consumers have come to rely on the modification and change their payment habits accordingly, only to be struck with an unexpected notice of default.

There is no law that specifically states, “This person qualifies for a loan modification, and that person does not.” However, there are guidelines and certain criteria that most lenders look for when considering a borrower for modification. These are:

• Valid economic hardship. A valid economic hardship is caused by unavoidable circumstances or events outside of the control of the borrower. There are many types of valid economic hardship. Ability to pay. Lenders want to see that the borrower has some source of regular income, although the amount of income may be less than what it was earlier. A borrower with a reduced income may qualify for a lower monthly payment. A borrower who has resumed earning income after a period of unemployment, during which the borrower fell behind on mortgage payments, may also qualify for lower monthly payments.

• Fallen property value: little or no equity. An underwater mortgage (where the value of the home is less than what is owed on the mortgage) makes refinance impossible and can make foreclosure commercially senseless. None of these criteria are set in stone. They are merely the criteria generally considered by lenders. Ultimately, you are seeking a new deal–one in which the financial numbers make more sense for both parties.

Short Sale

In a short sale, your lender agrees to stop the foreclosure while you list the property and attempt to sell it. When an offer comes in, you present it to the bank and offer the sales proceeds amount (though “short” of the full loan amount) in exchange for a release from the mortgage obligation, preferably without your owing the difference, known as the deficiency. There may also be tax implications after a short sale. If a short sale isn’t successful, you can offer the lender a deed in lieu of foreclosure by signing the property over to them in exchange for a release from the mortgage obligation. As with a short sale, you should have your lender release you from any obligation to pay the deficiency; get this release in writing as part of your deed in lieu of foreclosure agreement. There may also be tax implications from any release. A three-month short sale attempt is sometimes required by lenders before they will start negotiations on a deed in lieu of foreclosure. In a short sale and a deed in lieu of foreclosure, as well as a loan modification, you will have to deliver to your lender as part of your application a hardship letter (or affidavit) and other information for your lender to review.

Home Affordable Modification Plan (HAMP)

The Obama Administration introduced HAMP as part of the Making Home Affordable plan to stabilize the housing market. Under the federal loan modification plan, your monthly loan payments are reduced by modifying one or more components of your mortgage:

• Lower the interest rate

• Extend the life of the loan

• Lower the loan principle

• The Home Affordable Foreclosure Alternatives (HAFA) Program – Government assistance for a short sale or deed-in-lieu of foreclosure

Other Loan Mod Programs

• VA Loan – If your home mortgage is a Veterans Administration (VA) loan, then there is a specific government program called the Cal Vet Modification.

• FHA Loan – There is a loan modification program specifically for Federal Housing Administration (FHA) loans

• None of the Above – Banks who do not participate in the government programs may have their own unpublished loan modification programs with a different set of qualifications.

How to apply for a loan modification

If you are currently facing a financial hardship and want a loan modification, then know that time is of the essence. You have a greater ability to negotiate with your lender earlier on in the foreclosure process than later. Get started today:

• Collect Your Financial Information

• Collect Your Mortgage Information

• If you’re ready to begin negotiating for a loan modification, get some free advice before contacting your lender. Talk to a nonprofit housing consultant from a HUD-approved agency and find out how likely you are to qualify for a loan modification based on your individual mortgage and financial situation.

Nonprofit housing consultants from a HUD-approved agency can provide you with:

• All available loan modification options

• A customized action plan

• Budget suggestions

• Help in negotiating with your lender

Government Programs

Depending on the type of loan you have, it might be easier to qualify for a loan modification. Government programs like FHA loans, VA loans, and USDA loans offer relief, and some federal and state agencies can also help. Speak with your loan servicer or a HUD-approved counselor for details. The federal government offered the Home Affordable Modification Program (HAMP) beginning in 2009, but that expired on Dec. 31, 2016. The Home Affordable Refinance Program (HARP) expired two years later at the end of 2018. But HARP has been replaced by Freddie Mac’s Enhanced Relief Refinance Program and by Fannie Mae’s High Loan-to-Value Refinance Option, so these might be a good place to start for assistance.

Why Lenders Modify Loans

Modification is an alternative to foreclosure or a short sale. It’s easier for homeowners and it tends to be less expensive for lenders than other legal options. You get to stay in your home, and your credit suffers less from modification than it would after a foreclosure. Otherwise, your lender has several unattractive options when and if you stop making mortgage payments and it must foreclose or approve a short sale. It can:

• Attempt to collect the money you owe through wage garnishment, bank levies, or collection agencies

• Write the loan off as a loss

• Lose the ability to recover funds if you declare bankruptcy
These options damage your credit, and they’re expensive and time-consuming for lenders.

How to Get a Loan Modification

Start with a phone call or online inquiry, and let your lender know about your financial situation. Just be honest and explain why it’s hard for you to make your mortgage payments right now. Lenders will require an application and details about your finances to evaluate your request, and some require that you also be delinquent with your mortgage payments, usually by 60 days. Be prepared to provide certain information:

• Income: How much you earn and where it comes from

• Expenses: How much you spend each month, and how much goes toward different categories like housing, food, and transportation

• Documents: Proof of your financial situation, including pay stubs, bank statements, tax returns, loan statements, and other important agreements

How Long Does a Loan Modification Take?

Sometimes a lender or servicer will offer you a “streamlined modification.” The servicer picks an amount they believe you can afford and that they will accept as a monthly payment, offer it to you and upon three successful payments, your loan is modified. If the lender or servicer does not offer a streamlined loan modification, the process will depend on the mortgage lender, the ability to work through the procedure with your lawyer and other factors. The loan modification process could take to 3-6 months.

How Does a Loan Modification Affect Your Credit Score?

Some lenders might report a loan modification as a debt settlement, and this may have an adverse impact on your credit. If your credit score is already low and you are already behind on your mortgage, the impact to your credit may be minimal. But, if you have a high credit score, a reported debt settlement on your credit report could significantly impact your credit score. To protect your credit, you should ask your lender how they plan to report the modification to credit bureaus. Once the loan modification is set, making timely payments will improve your credit since these payments will be reported to the credit bureaus. Eventually, your credit score will increase as each payment will build a solid credit history.

Why Do I Need an Attorney for Loan Modification?

Attempting to modify your mortgage is like a part-time job. The paperwork is exhaustive and not so easy to understand. Unlike applying for a mortgage, the servicer or lender will not assist you. An experienced lawyer can guide you through the loan modification process. There are also numerous situations where homeowners were led to believe that the bank was working with them on a loan modification and trying to help them avoid foreclosure, but the bank foreclosed on their property anyway. If your mortgage lender is pursuing foreclosure while also deciding on your loan modification application, or if they are in violation of federal and mortgage service rules, a lawyer can help you enforce your rights. If the lender denies your modification request, you will need more time and assistance to appeal. An attorney can show why the loan servicer made a mistake in dismissing the loan modification application and may be able to push for approval of your modification request.