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October 18, 2007

How to Handle a Loan Modification

You’re suddenly notified of a higher monthly mortgage payment and you’re unable to afford it. Yet you already have a substantial down payment on your home and have been paying your mortgage on time for a few years, building up some equity.

You would think that would make you a good candidate for a loan modification, a change in the terms of your mortgage that would result in a payment you can afford. But you could be in for a surprise.

Lenders may actually be quicker to foreclose on your home than they would on that of your neighbor, who put no money down and owes more than the home is worth!

Why? Lenders would rather foreclose when they believe they can sell the home and recover out-of-pocket expenses, principal and interest and fees. If you have substantial equity in your home, the chances the lender can sell and recoup the entire mortgage balance are much greater.

Although it seems counterintuitive, you might have a better chance at negotiating a loan modification if you start letting your payments lapse. A missed loan payment can strengthen your case.

If you do seek a loan modification, expect to feel like you’re beating your head against a brick wall. But don’t give up. Too many people do. This is a problem that will not go away by itself. It will result in a sheriff’s sale, foreclosure and eviction.
Loan modification is “not a panacea. There’s just not a perfect solution to these problems. Typically, servicers will insist upon accrued interest.

This generally means that a modification will lower your monthly mortgage payment or let you skip a few payments, but the term of your loan will be extended. Bottom line: You’re paying off at least the same amount of debt and sometimes more.

Expect frustration

To get the process started, it’s always best to ask for a lender’s “loan mitigation department” or the “real estate owned (REO) department.” Still, getting a modification can prove frustrating.
I can tell you the process takes a few hours a day regularly — for anywhere from four to eight weeks. Some servicers have set up call centers in India.

Expect documents and records to get lost as they’re faxed back and forth. Get a supervisor’s name, and expect the process to repeat itself. It can be a tough task if you have to work for a living.
The key is to prepare in advance, and let your lender know up front, with complete documentation, what kind of payment you can afford.
This involves some homework before getting on the phone. Round up recent pay stubs, current or prior year W-2 forms, bank statements, property tax bills and insurance bills. If possible, obtain appraisal information for your home. Many property assessors’ offices will have data online or you can obtain an estimate of value on real estate Web sites, although those are often inaccurate.

Have you already tried unsuccessfully to sell your home? Have copies of your property listing agreement with the real estate agent. This way, you can demonstrate, for example, that you owe $200,000 on the mortgage and you haven’t received a single offer on your $180,000 listing price in three months.

Calculate your debt-to-income ratio in advance. This can be key to determining what kind of payment you can afford. A number of online calculators can help with this calculation.

Make a point of showing and documenting to people you communicate with that there’s no possibility I can afford the debts exceeding monthly income. I need to cut my payment to X dollars per month to make mortgage payments.

Credit dings

Always keep in mind that the lender and servicer don’t want to go through the expense of evicting you. They prefer the option makes them more money or costs the least. Present your solution with that in mind.

Remember that interest-rate reductions don’t show up on credit reports. But expect any payment modification to show up on your credit report and hurt your future efforts to obtain loans. Don’t expect a loan modification to necessarily get you out of debt either. A loan modification may be faster and more lucrative than attempting to sue your lender for predatory lending violations, if you think your jump in payment is abusive.

Simply because a mortgage is facing an interest rate reset doesn’t mean a homeowner was a victim of predatory lending. Those that buy mortgages look over the paperwork carefully for loans written in violation of predatory lending laws.