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Loan Modification

Loan Modification Overview

When someone wants to alter the terms of their mortgage payments, there are a couple of different options. The two options that are the most prominent are a refinance and a loan modification. Refinance is creating a new loan which absorbs the existing loan. Typically, the new loan would be at least the same principal balance as the prior loan, but it may be more if the borrower wants to get cash out of the refinance. In contrast, a loan modification is essentially the same loan rather than a new one. However, the existing loan will have some alterations to its terms. The alterations in a modification can vary. In some instances, it just involves taking payments that have been missed and re-amortize them into a new loan. In other instances, the interest rate or the principal balance is adjusted.

What Are The Reasons That People Generally Choose A Loan Modification?

People choose loan modifications for a few different reasons. The most prominent reason that an individual would choose a loan modification is because they’ve fallen behind. After someone is several months behind, most lenders will no longer take a single installment. Instead, they will require that all of the back installments be caught up in order for the loan to be treated as current. If a borrower tries to send in just a single installment after a loan has fallen behind, the lender will frequently reject that installment and send it back so that the lender isn’t waiving their right.

If someone has fallen behind on their mortgage, it’s usually with good reason, like having temporarily lost a job or having had a health-related issue. A loan modification creates an avenue where someone can get their loan back up-to-date so that they can resume making installment payments instead of coming up with a significant lump sum of money. As a result of changes in the loan terms, the loan payments that are under a modification are more beneficial than the loan payments before the modification. However, this isn’t always the case; sometimes there is little reduction in the loan payment after the back amount is put back into the loan.

How Do Loan Modifications Stop Foreclosures?

A foreclosure occurs because the loan has fallen behind. If the loan is modified and treated as current, then that would stop the foreclosure proceedings. In some instances, when a lender is processing a request for a loan modification, the lender will temporarily suspend the progress in the foreclosure case.

Who Is Eligible To Get A Loan Modification?

It’s important to be aware that loan modification qualifications are very individualized, as each lender or loan servicer will have their own qualifications. Even if you have multiple loans with the same lender, they may have different qualifications depending on who the loan investor is, and whether it’s a first loan, second loan or an equity line. So, it’s nearly impossible to present any detailed qualifications about who will or will not qualify for a loan modification. With that said, you normally have to have adequate income to be able to support ongoing payments in order to qualify for a loan modification. In addition, there usually has to be some equity in the property.

How Does My Credit Standing Affect Loan Moderation?

Loan modifications remain a possibility even if the borrower has impaired credit. Since most individuals who request a modification are behind on their mortgage payments, presumably there was some credit impairment experienced by the borrower before they applied for the modification. With that said, stronger credit is more advantageous, but I don’t think it’s wholly preclusive if there is some credit impairment.

How Does It Impact My Chances Of Getting A Modification If There Is No Equity In My House?

The equity in property does have an impact on loan modification qualification. This is another point where the specific figures are going to vary both lender-by-lender and loan-by-loan. Generally speaking, it is more likely that someone will obtain a loan modification if there is an equity buffer to support the modified loan. There are still some lenders that will consider loan modification on a property that is underwater (meaning that the loan balance exceeds the property value), but that is becoming more infrequent.

How Do I Know If A Loan Modification IS The Right Path For Me?

Usually, a loan modification or at least making an effort towards obtaining a loan modification is going to be the right direction if you have equity in the home and if there is a strong desire to remain in the home as opposed to selling or transferring it. Home ownership is very individualized. People have very personal connections, not only to the home itself but to their neighborhood and the experiences they’ve had in that location. For that reason, some folks will make more of an effort to retain the property. In that situation, loan modifications can be a good option to allow the consumers to get back on track with their mortgage.

What Is The Process To Apply For A Loan Modification?

Generally, the process of applying for a loan modification involves putting together a loss mitigation request package. Each lender usually has their own application that provides for the borrower to disclose their current income, expenses, assets and debts. The borrower will also be asked to provide some additional supporting documentation, which is transmitted to the lender. The lender may have some follow-up requests, and then the lender will make a decision as to whether or not the person qualifies and what terms would apply.

What Is The Hardship Letter? How Is It Used In A Loan Modification?

A hardship letter is a letter from the borrower to the lender outlining the personal circumstances that led them to fall behind. It is one of the documents that are normally required as part of the loss mitigation application, and it’s used to give the lender some sort of contacts and understanding as to whether or not the situation that caused the delinquency was reasonable and whether it is likely to affect the future ability to pay.

Do All Banks Engage In Loan Modification?

Virtually all institutional lenders-meaning all the big banks, such as Bank of America, Wells Fargo and Citi-have some form of loan modification process. For smaller and private lenders, it will vary from lender to lender.

What If The Lender Is Dual Tracking And You Receive A Foreclosure Notice?

Dual tracking refers to a situation in which a borrower is working with their lender to try to get a modification or other loss mitigation alternative, but the lender is moving forward with the foreclosure litigation process concurrently with that request. In Florida and many other states, a lender has to go through a lawsuit in order to be able to foreclose on a piece of property. That foreclosure legal process has many steps to it and it doesn’t occur overnight. In many instances, the lender is proceeding with the foreclosure process while they are working with the borrower to exchange the documents that are necessary in order for the lender to consider a modification.

How Long Does It Typically Take To Get A Loan Modification?

It’s difficult to set a timeline for the modification process. The reason why it’s difficult is because it can be extremely complicated for a lender to treat a loss mitigation request as completed. As a result of many banks being so large and receiving such large volumes of paperwork, it is not uncommon for documents to be incorrectly assigned to an application or to be missing altogether. In other cases, a portion of the application may be filled out incorrectly. Any of these things can cause an application to be considered incomplete.

It may take some time before the lender informs the borrower that there is some sort of a problem with the application, and by the time the borrower has deciphered what sort of information is missing, the lender may say that there is something else that’s missing, or that a document is no longer adequately current for the lender to consider it in the process. That makes this situation (which I refer to as a “merry-go-round”) complex in terms of how long the modification process will take. For some borrowers, it has taken a year or longer before the lender will actively start to process the loss mitigation request.

From the time that the loss mitigation request is treated as complete, there’s a processing time that can take anywhere from 30 days to several months. But even after the loss mitigation request is treated as complete, the second round processors (which typically are the underwriters) may ask for even more information, sending the loss mitigation request back onto the merry-go-round. Since the timeline can be ever changing, it is very difficult to generalize a timeline.

Additional Information About Loan Modifications In Florida

One additional note, with respect to loan modifications concerns the interplay between loan modifications and different legal processes. When a loan is in foreclosure, a borrower typically has an opportunity to ask for mediation, which is like a meeting with the lender. Mediation can sometimes help to encourage loan modification processing. When dealing with bankruptcies (especially chapter 13 bankruptcies), the Tampa division of the bankruptcy court offers a Mortgage Modification Mediation Program (MMM Program). This program has been very effective in encouraging modifications.

The bankruptcy court doesn’t force the lender to make a decision to modify the loan, but they do have certain tools to help create accountability for the lender to encourage them to act in good faith.

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The Tancredo Law Firm has assisted thousands of individuals with the process of loan modification over the past 20 years.

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