Q: When I’m driving to work, it seems like every five minutes I hear another advertisement for loan modification services on the radio. I’m not behind on my mortgage, but it is set to adjust next year — will my mortgage company actually work with me to stop that from happening? I’m also upside down by about $75,000 — will they reduce the amount I owe, too? If so, will they charge me points like when I refinanced? Can I do it myself or do I need to hire one of those services?
A: Believe me — we’ve all heard those ads! And they are not all scams. Loan modification is a legitimate possibility, and there are do-it-yourself options as well as legitimate loan modification consultants with successful track records at helping their clients obtain modified mortgage terms that work for them.
Mindset Management
Getting your mortgage modified might very well be possible for you, but I don’t know anyone who would call it simple, easy or painless. But the upside potential — saving your home — is good enough to warrant the pain.
Part of the pain I see would-be loan modifiers experience is shattered expectations. So let’s create some realistic expectations. First things first — I do not see many people successfully obtaining principal reductions, that Holy Grail of loan modification in which the lender simply forgives a big chunk of the debt you owe, because your home is upside down. There is little to no incentive for a mortgage lender to do this, as it locks in their losses from the down market and allows you to reap 100 percent of the benefits when the market recovers. If your home is upside down and you don’t want to own it unless you have positive equity in it, then loan modification may not be for you. If, on the other hand, you would like to keep your home for a long period of time and are OK riding out the bumps in the market, a modification might give you the relief from a mortgage payment adjustment that makes keeping your home feasible.
Also, I think we have all heard the party line that lenders do not want to own more foreclosed properties due to the expense of maintaining them, the fact that they are not in business to own properties, the costs of foreclosure, etc. This mantra, while true, has caused many of us to expect that when we call up a lender, express that we’d like to keep our home and request a lower rate or payment, the lender will trip over themselves in their haste to help us avoid foreclosure.
Suffice it to say, this is not exactly the case.
The process of applying for and obtaining a loan modification takes the average homeowner somewhere between 30 and 90 days, filled with preparing detailed financial statements and packages; writing letters; calling for status checks; wondering why on earth your calls haven’t been returned; again providing the same financial statements and letters you submitted to get the process going in the first place; getting a negotiator assigned; waiting for a new negotiator to be assigned when your first one quits to go work for a loan modification consulting firm; and so forth. Eventually, the lender offers a loan modification that provides a payment the borrower can live with. Or not, but there’s no real way to know until you go through the process.
Fortunately, applying for a loan modification directly from your lender does not cost anything, but if you use a consultant, you can expect to pay anywhere from $1,500 to $4,000 for their services.
So, go into it expecting the loan modification process to be one of the least fun experiences you will ever have. Educate yourself about what loan modification involves so that you can make yourself as strong a candidate for loan modification as possible, and so that you can propose and negotiate a modification with long-term sustainability. And, again, stay mindful that the potential outcome of keeping your home is well worth it. Oh — and if you lack the energy, the resilience, the fearlessness or the time to do this process, and you have a few thousand dollars to invest in saving your home, consider hiring a reputable, ethical loan modification consultant.
Need-to-Knows
According to HUD, a loan modification "is a permanent change in one or more of the terms of a mortgagor’s loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford."
Reality-check time — lenders don’t just prepare loan modifications to order. The loan terms they are willing to modify, as a rule, include the following elements, which are designed largely to reduce the borrower’s mortgage payment:
- Loan term — Lenders will often add months or years to the term of a mortgage, to give an owner more time to make up for missed payments, or to lower the amount of monthly payments;
- Loan type — Negatively amortizing loans and fully adjustable-rate mortgages (ARMs) can be converted into interest-only and/or fixed-rate loans;
- Interest rate — It is very common for a lender to reduce the interest rate as part of a loan modification;
- Scheduled or past rate/payment adjustments — The interest rate and payment on a loan that has adjusted or is set to adjust can be "fixed," either extending the fixed-rate period before adjustment or converting the loan into a fixed-rate mortgage for the remainder of the loan term.
The loan terms they are unlikely to modify? Principal loan amount, as discussed earlier. The exception is a government program called Hope for Homeowners, through which participating lenders agree to allow you to refinance your mortgage and reduce the principal to 90 percent of the fair market value of your home. I do not personally know anyone who has navigated this program successfully, but a number of lenders claim they are willing to make these exceptions to the no-principal-reduction rule on a case-by-case basis. Hope for Homeowners is, strictly speaking, a refinance program, not a loan modification; get more information at HUD.gov/HopeForHomeowners.
Good candidates for modification are homeowners who (a) have a valid reason they fell behind in the first place, like a change in their income or a change in the payment amount, and (b) can document sufficient income to make the agreed-upon post-modification payments. Lenders don’t modify loans for people who can’t afford to make the payments they are agreeing to. Loans that have adjusted or are set to adjust are good candidates for modification. Unfortunately, it turns out that lenders seem to be more likely to modify loans for borrowers who are late on their mortgages (but not so late that the foreclosure auction is set for tomorrow!), and the companies most likely to grant modifications (in my experience) are the lenders who have gone under and been bought out. Also, loan servicing companies seem to be tougher to secure mortgage modifications from than mortgage banks.
There are numerous self-help options for obtaining a loan modification. You can contact your mortgage holder directly, or find a free HUD-approved housing counselor at HopeNow.com. However, many borrowers I know have attempted this process solo and grown so frustrated with the lender’s unresponsiveness and time-consuming false starts that they look for other assistance.
If you don’t have the time or energy to manage your own loan modification, or you just aren’t getting anywhere with your lender, you might consider hiring a loan modification consultant. I know this is controversial advice, because there are charlatans galore in this field. With that said, there are reputable, ethical loan modification consultants who (a) offer money-back guarantees, (b) will not take your money until they have given you an accurate idea of what modifications they are likely to be able to help you secure, and (c) are actually helping people save their homes. I know attorney-assisted loan modification firms who have more than a 90 percent customer satisfaction rate and are able to complete modifications in about half the time it would take the borrower to do it themselves. Keep in mind that their services are not cheap, though — expect to spend up to $4,000 for a good loan modification consultant. For that reason, you might want to give it a try yourself or with a HUD-approved housing counselor first, especially if you meet the above-described criteria for being a good candidate for mortgage modification.
Action Plan
1. Gather all your financial documentation together, including: income and expense information and documentation; your most recent mortgage statement(s) from all mortgages; and bank statements. Your lender will need these items, and they will help you get clear on what you can and can’t afford.
2. Write a hardship letter detailing why you are in mortgage and financial distress, and why you feel you will be able to get and stay current on your mortgage, if modified.
3. Find a HUD-approved housing counselor at HopeNow.com.
4. Contact your lender’s loss mitigation department and apply for a loan modification.
5. If push comes to shove, ask your Realtor for a referral to a reputable loan modification consultant.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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