James R. Balmforth: Can I Qualify For A Loan Modification?

A loan modification is a formal agreement between a borrower and a lender that modifies or amends a pre-existing loan. The original terms of the mortgage can be modified to lower the unpaid principal balance, interest rate, or a combination of both, which in turn lowers the monthly mortgage payment.

Most banks are in the business of lending, not owning real estate. They make money when a loan is performing or paying on time, not when it’s delinquent. When homeowners fall behind, banks protect their interest in the property by initiating foreclosure. This legal process can be expensive and time-consuming. Most banks would prefer an alternative solution that gets the homeowner back on track and paying again — avoiding foreclosure if possible.

Loan modifications are designed to adjust the terms of the loan to make the loan more affordable in the long run and, hopefully, keep the borrower from defaulting again in the future.

Qualifying for a loan modification

Qualifying for a loan modification program greatly depends on your personal financial situation and the length of time your loan has been in default. The longer a loan is delinquent, the less likely the mortgage company will be to consider a modification. Additionally, the homeowner will likely need to provide evidence of hardship, explaining what circumstance has negatively impacted their ability to repay the loan, such as:
• Death of a spouse or income provider.
• Temporary loss of income.
• Divorce.
• Medical illness.
• Emergency.
Loan modifications are one loss mitigation option. Loss mitigation is a term used in the mortgage industry that refers to the mortgage company’s or loan servicer’s process to mitigate a loss — or in other words, prevent foreclosure. Most servicing companies or lenders will want you to apply for loss mitigation, and they will determine whether you qualify for a modification. If you simply cannot afford a mortgage any longer, an alternative solution like a deed in lieu or short sale may be a better option for both parties.

Applying for a loan modification

If you feel you could benefit from a loan modification, reach out to your lender or servicer’s loss mitigation department as soon as possible requesting a loan modification application.

Most application packages will ask you to submit a hardship letter in addition to your current financial information, which could include:
• Tax returns.
• Proof of income, which could be copies of pay stubs.
• A current financial statement or financial summary.
• Estimation of property value.
• Bank statements.
• Proof of hardship (such as death certificate, medical statements, divorce papers, etc.).

Lenders will look at the entire packet in addition to reviewing your credit score, debt-to-income ratio, and current loan terms to help determine whether you qualify.

Some banks will have their own modification programs, while others will use government-backed programs like:

• Freddie Mac’s Flex Modification program.
• Fannie Mae’s High Loan-to-Value Refinance.
• Freddie Mac’s Enhanced Relief Refinance program.
If you have a Freddie Mac or Fannie Mae mortgage, you may be eligible for one of these programs.

While you can apply for a loan modification yourself dealing directly with your bank or lender, you can also use a HUD-approved housing counselor or an independent, third-party loan modification company to help you with this process.

A loan modification company charges a fee for its services. A HUD-approved housing counselor offers their services for free since they are a government agency.

Both represent the homeowner through the modification request process, helping them gather and submit the required paperwork and negotiate terms with the bank, and they can even help counter if the application is denied or assist in filing an appeal.

A HUD-approved housing counselor is often a safer, more affordable way to go, but if you do work with a loan modification company, make sure they have verifiable experience getting affordable home modifications approved for other homeowners as well as experience negotiating with your bank or lender. You’ll also need a firm understanding of what fees they charge for their service.

Qualifying for a Loan Modification

Qualifying for a mortgage loan modification can be rough. With all the horror stories out there, you can’t blame some borrowers for just not wanting to try. But there are some general guidelines that can give you a pretty good idea of whether you can succeed or not.

Part of the confusion is because lenders have their own standards apart from the government’s Home Affordable Modification Program (HAMP). For example, HAMP guidelines specifically state that you don’t have to be delinquent on your mortgage to qualify. However, many lenders won’t consider you for the program until you’ve started missing payments.
Another thing is that HAMP isn’t the only type of loan modification out there. In fact, you’re about twice as likely to qualify for a non-HAMP loan modification as you are to get one under the government-backed program. These private, or proprietary, loan modifications are done according to the lender’s own rules, whereas HAMP sets forth certain requirements that lenders must adhere to.

That being said, there are some basic guidelines that you have to meet to qualify for any type of loan modification:

You have to be suffering a financial hardship.

This may be a loss of a job or reduced income, a serious illness, costly medical bills, a balloon payment due on your mortgage, a divorce or excessive debt are all examples. A loss of equity or the fact that your home has lost value is not considered a qualifying financial hardship by itself.

In most cases, you have to be able to show the situation is an enduring one that is not likely to improve in the foreseeable future – for example, a salesperson who’s having a bad year will probably have a difficult time qualifying.

You also have to be without cash reserves that would enable you to continue making your mortgage payments. For example, Chase will not consider you for a loan modification if you have savings or other cash assets greater than three times your monthly mortgage payment. Retirement savings accounts that penalize early withdrawals are not included.

You have to show you cannot afford your current mortgage payments.
It doesn’t matter if you’re financially stressed, if the bank thinks you can find a way to meet your payments, they’re not going to approve you. This is one reason why many lenders require you to actually be in default before they’ll consider you for a loan modification – if you’re still making your payments, they’ll figure you can still afford them. To qualify, lenders will generally expect that your total recurring debt payments exceed 41 percent of your gross monthly income, with your mortgage exceeding 31 percent. Some will expect an even heavier debt load. They’re also going to take a look at what kind of debt you have – if you seem to be making payments on a car you can’t afford, or otherwise appear to be living beyond your means, they’ll expect you to tighten that up before they approve you for a loan modification.

You have to be able to show that you can stay current on a modified payment schedule. Lenders aren’t going to go to the trouble of giving you a loan modification if you’re still going to default anyway. That’s why unemployed persons can’t qualify for a loan modification, unless they have a spouse who’s still working – you need to have some way of making the payments, and unemployment compensation eventually runs out.

You’re going to have to be able to document your income, meaning pay stubs or W-2’s if you’re an employee, or tax returns, bank statements or profit-and-loss statements if you’re self-employed. If you’re depending on secondary sources of income to help pay your mortgage, you’ll have to document those as well.

The property has to be your primary residence to qualify for a HAMP modification.

This is a hard-and-fast rule with HAMP. However, lenders may be more flexible with private modifications. They may be willing to modify a loan on a rental property, since it produces the income needed to pay the note. In some cases, they may even approve a modification on a second home, if they think they’d take a big loss retaking it in foreclosure. But generally speaking, you have to live there in order to get a loan modification on the mortgage.

Getting a loan modification can be a difficult and frustrating process. But nearly 700,000 U.S. homeowners succeeded in obtaining permanent mortgage modifications through the first eight months of 2011, according to the HOPE NOW Alliance. Maybe you can join them.

Will I Qualify for a Mortgage Loan Modification?

Applying for a mortgage loan modification is much like applying for a general mortgage. Factors for the lender to consider in a loan modification will include income and the likelihood that it will continue, as well as how much equity you have in the property.

Primary Residence

Getting a loan modification on a primary residence, which is the property where the borrower lives as their main home, is usually much easier than getting one on an investment property.

As a rule, lenders are more conservative with investment properties than with homes that borrowers live in. This reason is because if a landlord is dependent on renters for the income to cover the mortgage payments, the fact is renters may pack up and leave at the end of their lease, sometimes earlier. The renters have no attachment to the property.

However, homeowners usually have an emotional attachment to their property, and usually do what they can to keep it. Additionally, knowing that a foreclosure could disqualify them from buying another home for the next four to five years gives them more incentive to want to keep their home, or at a least get out from under the mortgage without going through a foreclosure.

Financial Hardship or Distress

Borrowers, for a variety of reasons, may find themselves in financial hardship, causing them to be unable to pay their mortgage every month. Loss of income or unexpected expenses are generally the culprits, and may legitimately result from job loss, business difficulties, a divorce or a medical situation, among causes.

Lenders understand that this stuff happens, but they want to know how a borrower is going to move forward from the hardship and into a position to be able to make payments once the mortgage is modified.
Write a hardship letter to the lender at the beginning of the process, and include it in the modification application package to both help save time for overworked lender employees, and clarify where you, the borrower has been, and where you are headed.

Unable to Refinance Mortgage

Refinancing into a lower interest rate or better terms is usually the preferred option for borrowers who are looking to lower their mortgage costs. A loan modification is typically the choice for those who can’t refinance, or whose mortgage already offers attractive terms but need some temporary “breathing room” to get through a financial hardship.
However, because a refinance needs good credit, borrowers who expect possible financial stresses down the road should begin to explore a refinance immediately, rather than wait for trouble to arrive. A borrower who has begun to miss or be late on mortgage payments will likely face challenges in trying to refinance, due to a damaged credit rating, and might find that a loan modification is their sole option at that point.

Debt-to-Income Ratio

One of the main factors a lender takes into consideration for loan modifications is the borrower’s debt-to-income ratio. This is the ratio of gross monthly income (before taxes) to total mortgage payment. Lenders vary in the maximum debt ratios they’ll accept, but are generally in the 36 percent to 45 percent range. Compensating factors such as credit score, and the amount of equity in the property will lend to the decision that the lender makes in determining if a borrower should get a loan modification.

Important factors to consider

Remember that the bank or servicing company is working for the lender’s best interest. You may receive an offer that isn’t an affordable modification plan. Adjustable rates or step-up plans rarely work. Press your lender to provide you with modification terms that you can sustain in the long run.

Don’t feel pressured to accept the first modification offer that comes to the table. Terms are negotiable. Make sure all options for adjusting the terms of the loan have been explored. Depending on what the lender modifies, you could end up paying a lot more over the life of the loan.
There is almost always a positive solution for both parties, one that agrees with the bank’s bottom line and is an affordable long-term solution for you. If you need help, remember to find a qualified, experienced, and licensed counselor to help you through this process.