Loan modification is a process that enables those in danger of foreclosure to modify or rearrange their mortgage. Fundamentally, the purpose of mortgage modifications is to enable homeowners with payment difficulties to keep current with their repayments and retain ownership of their homes.
There have been problems with these in the past, and many lenders have preferred to foreclose rather than to agree to a loan modification. In some cases a poor lending decision has been the cause of the homeowner defaulting on monthly payments. Now the borrower must ask that lender for a better deal – that is basically what the process involves.
Nevertheless, this is a means of avoiding foreclosure. A homeowner must be in default of repayments for at least 60 days before the lender can foreclose. Application for a loan modification should preferably be made long before this period has been reached. There are two basic ways of doing this.
Loan Modification and HAMP
The Home Affordable Modification Program (HAMP) offers mortgage modifications to homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac. There are certain conditions, such as that the loan must have originated on or prior to January 1st, 2009. There are others, and the financial hardship behind the inability to maintain agreed payments must be documented and proved.
Such modifications are mandatory for Fannie Mae and Freddie Mac loans. Naturally, the conditions must be met, and if you are in this position, you should approach your lender. Alternatively seek the advice of a professional mortgage advisor.
Private Mortgage Modifications
Private mortgage lenders are not obliged to conform to HAMP, but may do so voluntarily. If you have a mortgage of this type, then you must make an application to your lender for the loan modification. Before doing this you might consider seeking the advice of a mortgage expert.
There are many modification companies who will offer to expedite the process for you. This can be costly and there is no guarantee of success. Only Fannie Mae and Freddie Mac mortgages are guaranteed to be offered a mortgage modification. The situation with every lender and borrower is unique to that loan. The proper way to go about seeking information is:
a) Visit the makinghomeffordable.gov website. This site offers good advice on this subject, and also free qualified advice from the phone number provided (888-995-4673).
b) Contact your mortgage lender. Ask for advice on their approach to mortgage modifications and other ways of avoiding foreclosure.
It is important that you maintain your mortgage payments throughout the application process. Do not make your payments to any third party that offers to do so for you, but pay directly yourself as normal.
Types of Mortgage Loan Modification
Your mortgage can be rearranged in a number of ways. The method, or combination of methods, applied to your loan could any of:
- A straight reduction in your monthly payment. This could for a specific time period until your finances are stronger, or the loan period could be extended.
- An interest rate reduction
- A switch from a variable rate to a fixed rate.
- A reduction in the fees charged for late payments.
- Mortgage settlement- meaning a reduction in the principal sum still owed.
- Temporary forbearance: you may be allowed to reduce your payments temporarily or your payments even stopped for a period of time. A form of suspension of your mortgage payments during a temporary difficult financial period
Which method is used will be determined by the type of mortgage you have and the amount by which you are in arrears. Another important factor is the evidence you provide explaining the reason for your predicament. This is extremely important.
If your situation has occurred through overspending in other areas rather than due to unforeseen circumstances (job loss, illness, reduction in income, sudden interest rate increases), then you might find it difficult to be offered a loan modification. However, seek advice before doing anything else.