The Loan Modification Process Explained

An Ounce of Foreclosure Prevention is Worth a Pound of Cure

Aug 16, 2009

It costs the banks significantly more to foreclose than it does to modify a home loan. Unfortunately, the complex nature of the loan modification scares homeowners away.

Home loan modifications are a relatively new phenomenon. Until recently no one would have dreamed of asking the bank to change the terms on a loan. But given the cost of the alternative, the vast number of distressed borrowers, and the government incentives offered, banks today are not only considering it, they are doing it for homeowners everyday.

Understand Loan Modifications

In order to understand loan modifications borrowers must get familiar with the terminology used by lenders and servicers. It's important to understand that every mortgage lender has different policies and procedures; where loan modifications are concerned, there is no standard process. That said, there are many elements that are the same from lender to lender.

Regardless of what the lender requests, it is important to document everything. Keep a log. Record every conversation. Include the names of every person involved and list every document submitted. Keep fax receipts and copies of items sent via certified mail.

Prepare to Make a Loan Modification Request

While the document requirements vary from lender to lender, borrowers should be prepared with the following:

Explain Issues In the Credit Profile

Homeowners should review a copy of their credit reports from each of the reporting agencies prior to contacting the lender or servicer. Errors should be corrected if possible and a detailed explanation of any delinquencies or deficiencies should be written. If a repayment agreement is set up with a creditor, copies should be included with documents forwarded to the mortgage lender or servicer. This information will help the lender or servicer to get a clear picture of the borrower's financial situation.

Determine if Predatory Lending or Illegal Lending Practices Were Involved

Many of the so-called predatory lenders are making loan modifications these days. The reason is that they are in trouble and they know it. Evaluating a loan for violations or fraud takes an expert. A competent attorney can review the documents and determine very quickly if there was a violation or fraud. At that point homeowners should contact the appropriate government agency to file the complaint.

Draft the Hardship Letter

Hardship letters should state, in detail, the particular hardship that has made a loan modification necessary. Providing supporting documentation in the way of dismissal letters, decreasing pay stubs, receipts for additional expenses, etc. can help the lender to get a clear picture of the situation.

Contact the Lender

Once the proper documentation is compiled it is time to contact the lender or mortgage loan servicing company. Have the loan number, property address, and social security number available. Ask to speak with the department that handles loan modifications. Lenders typically take a preliminary expense and income listing and request that budget information be sent along with whatever paperwork they require. Initial contact should be made by phone and should be recorded in a log that is kept with all of the paperwork.

Negotiate the Loan Modification Terms

A mortgage is a contract between the borrower and lender. Terms were negotiated prior to drawing up the contract. Modifications to that contract are a negotiation as well. The lender will want the terms to be kept as close to the original terms as possible. Homeowners need to state clearly what terms they need in order to honor the terms of the loan.

Agreeing to terms that cannot be met is not good for the lender or the borrower. It is important, however for borrowers to be realistic in their expectations of the lender. If the initial offer is too high, its okay to ask for a longer repayment term. Just don't expect lenders to go back and forth with multiple offers. Additionally, an important part of the negotiation is showing good faith. That means being available to field phone calls, providing all requested documentation and responding on a timely basis.

Sign the Agreements

It's not over 'til the documents are signed. Once the modification has been completed, sign where needed and file properly executed documents in a safe place. Take care to return the documents to the lender before deadlines expire or risk losing the modification before it goes into place.

After the loan modification has been completed borrowers should focus on keeping the loan current and managing other credit so they are well positioned for the future.

The copyright of the article The Loan Modification Process Explained in Mortgages/Loans is owned by Robert J. Buscho. Permission to republish The Loan Modification Process Explained in print or online must be granted by the author in writing.