What is a Loan Modification?
A Loan Modification is a negotiation between a lender and a borrower whereas the loan terms are restructured without refinancing. The rate and terms of the loan are restruc- tured to fit the current financial situation of the borrower.
Banks and lenders would rather take less money and keep homeowners in their home making a payment that they can afford, rather than go through the expense of foreclosing on the home, hiring a listing agent, rehabilitating the home, and letting it sit empty on the market for months, only to lose thousands in the process.
A loan modification is a good solution for those who cannot refinance, are behind on payments or struggling to make the payments, have experienced a genuine hardship, and want to stay in the home. A loan modification is a permanent solution and is not meant to be used as a temporary stop to the foreclosure process.
Are lenders and banks really willing to negotiate?
Absolutely! In these market conditions, banks and lenders have been mandated by the govern- ment to do everything they can to work out a payment plan with their borrowers. This is a great thing for today's borrowers especially for those who are running late on their pay- ments or are having trouble making them on time.
Lenders do not want to foreclose on your home unless they have no other alternative. If you can present them with a realistic proposal that makes sense, they are very open and receptive to the loan modification process.
Who qualifies for a home loan modification?
Anyone who can prove they are having a tough time or "hardship". Especially those who are at least one month behind on a mortgage payment, those with negative amortizing loans, those with loans that are about to adjust, those who are upside down on their loan and those who would rather keep their home than do a short sale. One of the perks when doing loan modifications is that there are no credit checks so everyone qualifies in that aspect.
The bigger the hardship you are having, the more negotiating power you have with your lender. Remember, they don't want to foreclose on any more homes. They would rather keep someone in the home and create a solution that will be affordable rather than go through the cost and expense of foreclosing on the property.
Can I negotiate a loan modification myself?
Yes, you can D-I-Y and many homeowners do, however, it's becoming more and more difficult as more homes are falling into foreclosure. It takes a great deal of time, commitment and lot's of follow up, but it's doable. You can contact your lender or your bank and see about going through the process of loan modification or you can hire a professional to it for you.
If you decide to D-I-Y, here is typically what you'll you need to get the ball rolling...
- Hardship Letter - Include dates, reason for delinquency, what you have done to attempt to workout problem in the past; also include any supporting documents for hardship. It's best if your hardship letter comes from
- Bank Statements - Last two (2) months.
- Proof of Wages and Salary - Employed - Pay stubs for last two (2) months; Self-employed - 1040s for the last two (2) years.
- Federal Tax Returns - First and second pages (W2s) from the last two (2) years.
- Rental Agreement - If the loan modification is not for your primary residence.
Typically on any loan modification, the bank has their best interest at heart. They neither have the time nor the inclination to hear about what troubles homeowners might be experiencing. What usually ends up happening is that the bank will negotiate an agreement that helps them but still leaves homeowners with only a temporary solution.
Should I hire a professional to negotiate a loan modification?
If you find yourself with a temporary solution, it's time to hire a prefessional. There are several advantages of hiring a professional, HOWEVER you must also be very careful if you choose to use a loan modification company that takes a fee up front to negotiate your loan modification for you. It could end up costing you another month's mortgage payment plus your savings in exchange for false hope. No one can ever guarantee a successful modification, so NEVER spend any money with any company unless they can guarantee your money back if they're not successful with the modification.
It has become such a big issue with loan modification companies promising things to homeowners, taking their money and leaving them with nothing, that in January 2011, the FTC issued a new rule to protect homeowners that are struggling to make payments from these mortgage relief scams. The rule is called the Mortgage Assistance Relief Services (MARS) if you want to google it and read the specific law. But basically these companies cannot collect fees until results are actually seen and the homeowner is happy, which is the way it should be.
Alternatives to Loan Modification?
One thing we just started doing recently is settling notes for homeowners. This is a lot different than a loan modification, however, it accomplishes that same purpose but may actually be even better. If you have a 2nd mortgage, we can basically wipe it out for pennies. This not only lowers your monthly payment, but you never have to pay back the amount that was wiped out. So it could be better than a loan mod. Here is a link if you want to read about settling your note.
So whatever you do, don't EVER give up without doing all you can to save your home. You have several options you may or may not even know about. Don't just let the bank take your home. You do not want a foreclosure on your record.