How Do Loan Modifications Work

Sphere: Related Content I’ve heard story after story regarding the mortgage crisis, financial struggles, and the amount of borrowers on the verge of foreclosure. The most common alternative to foreclosure is loan modification. Although this is the most common alternative, many people still don’t understand how it truly works.

First of all, loan modifications are VERY common due to the fact that it can be beneficial for both the lender and the borrower (see Benefits of Loan Modifications). Homeowners get to keep their homes and lenders save their investments and prevent additional costs accumulated by legal and maintenance of foreclosed properties.

The following are the necessary facts borrowers need to know about loan modification and how it works:

1) Loan modification must be fully reinstated.
2) The mortgage loan is reinstated, making monthly payments affordable for the borrower.
a. Rates are either reduced or loan term extended.
b. The lender or mortgagee may re-amortize the total unpaid amount due over the remaining term of the loan OR may extend the loan through the lesser one of two ways:
i. Term may be extended no more than 10 years after the original maturity date OR
ii. 30 years (360 months) from the modified mortgage’s first installment’s due date
3) The PITI in arrears may be added to the mortgage balance.
4) The mortgage balance after the loan modification may exceed 100% LTV or may exceed original loan amount.
5) All fees accumulated through the service of the loan modification CANNOT be paid through the newly modified mortgage.
6) The newly modified loan MUST have a fixed rate.
7) The modified loan MUST be in first lien position.

The following are the requirements that borrowers have to meet to qualify for a loan modification:

1) Many lenders require at least 2 late payments, at least 61 days, and/or 3 full payments due. However, it is not impossible for a mortgagor or borrower to be persistent and possibly change a lender’s mind as long as the requirements below are met.
2) Default or financial struggle is evidenced or verifiable.
3) Origination date must be at least 12 months before application of loan modification.
4) Property under the mortgage must be borrower’s primary residence.
5) Ability to repay debt must be verifiable.
6) FHA mortgage is not allowed.
7) Mortgage loan CANNOT be in foreclosure status.
8) Property must be properly maintained and in good, saleable condition.

A borrower can certainly attempt to modify their mortgage on their own. However, borrowers may find difficulty in doing so and sometimes fail due to lack of or too much information disclosed to a lender or mortgagee.

Trusting companies and others who claim to have years of experience in loan modifications may be a difficult thing. There are many dishonest companies and individuals who will say or do whatever it takes to earn the trust of struggling individuals. Many claim to be legally backed by law firms and consultants who “specialize” in loan modifications. It is important to do communicate, get a feel for their true identity, and do a bit of research on these companies before allowing someone to handle very important documents regarding one of or your most valued assets.