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| Chart Provided Courtesy of Bankrate.com |
By Chris Qualmann
Loan modification is the process of negotiating a change in the terms of a loan. It is not a "re-fi" or a "new loan" but rather a mutually agreed-upon revision to an existing loan. It's used by homeowners who can no longer make payments on time (or are on the verge of defaulting) and want to avoid the consequences of default. Because the lender must approve a loan modification (and also because securing new terms may mean the difference between remaining a responsible borrower, or losing one’s home, along with suffering severe credit damage and monetary penalties) a borrower should know how to best increase his/her chances of being granted a modification.
Tip 1: Work with an Experienced, Qualified Loan Modification Professional
Whether it be an experienced consumer counselor with legitimate, verifiable loss mitigation training, or an attorney specializing in cases of this nature, it’s critical to work with a qualified loan modification professional. A respected, seasoned, well-educated modification negotiator will command far more respect from a bank’s loss mitigation department than so-called “loan mod experts” with a clear lack of training, experience and finesse.
Tip 2: Understand the Process (and be Patient)
The process of loan modification is very time consuming, and a lender’s specific procedures for reviewing a request for modification must be followed with precision. The borrower and his representative should be familiar with the specific lender's loan modification policy as well as any applicable government-based loan modification programs.
Tip 3: Be Proactive and Early in Communicating with your Lender
Ultimately, to get a loan modification, you must prove your worth to the lender. Instead of simply making late payments or not making payments at all, you should notify the bank before the payment is due that you will not be able to make the payment. By being proactive and contacting the lender early, you're showing that you're conscientious and aware of your finances. If a borrower does not contact the lender early, when the borrower finally applies for loan modification he or she must clarify specifically when the financial troubles started (and the exact reasons behind the troubles).
Tip 4: Complete All Paperwork Accurately and Completely
A lender needs to see a clear, complete picture of a borrower's finances before loan modification will be approved. Among other things, you must collect all of your expense, income, and cash flow records. The amount and type of paperwork required varies among lenders, but all banks will reject applications that are partially completed or clearly inaccurate. Faulty, slipshod paperwork means the lender needs to contact the borrower, send back the paperwork, wait for the "new" paperwork, and then re-review the entire package. The less work you force the lender to do, the better.
Tip 5: Submit a Specific Modification Request (Inclusive of Proposed Terms)
Because you will be submitting a package of documents to the lender, you should include a a professional cover letter (with an index of the attached documents) as the first, "top" document of the materials. In this cover letter, it's particularly critical to propose in detail the exact new terms that you're requesting. The proposal should include, for example, any proposed adjustments to the interest rate, term of the loan, and principal balance -- with an explanation as to why the particular terms are being proposed.
Tip 6: Write a Good Hardship Letter
A hardship letter is the borrower's opportunity to explain the reason that he/she can no longer make payments to the lender. The hardship letter should be factual, not emotional. It should not attempt to convince the lender of who is at fault, why someone got fired from a job, or any other issue not directly related to an inability to pay. Acceptable hardships are job loss, death, illness, or some other unforeseen monumental event. The hardship letter must also contain an explanation of how the borrower will meet the new terms of the loan. The bottom line, is that most, if not nearly all loan modification programs (whether offered through the government, or "privately" by the lender) are hardship based, and as a result, the borrower's hardship must be honest, verifiable, and caused due to no intent on the part of the borrower. Further, the borrower must show that once the loan is modified, he/she fully intends to make payments on time and, as a result of the newly arranged terms, will be able to do so.
Tip 7: Predict the Future / Show Rehabilitation of Financial Hardship
As stated above (and a point which cannot be emphasized ENOUGH) ... you must prove to your lender that that once your loan is modified, you will make payments in the future on a timely basis. It's for this reason that many modifications begin as "trial" modifications (usually for a period of 3-4 months) before being made "permanent". You must explain to the bank how long it will be before your finances and cash flow will improve (if the improvement has not occurred already); how long you expect it will take to get back on track ... and how you will avoid hardship in the future. One common way of making such a showing is to not only show an improvement in income, but also that your expenses have significantly decreased (and that certain "large debts" have either been satisfied, forgiven, or otherwise removed from your credit report by operation of law.)
Ultimately -- in order to obtain a good, affordable, and aggressively modified mortgage payment consistent with market rates and industry standards -- you and your loan modification professional must convince your lender: (1) Your prior financial hardship has been rehabilitated and is now a "thing of the past" and; (2) Upon loan mod approval being granted, from that point forward you will be a responsible, reliable, low risk customer.
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