If you’re having problems paying your mortgage, one option you have to avoid foreclosure is a mortgage modification to lower your monthly mortgage payments. Read on to find out what a mortgage modification is, how you can obtain one, and what options you have if you don’t qualify for a modification.
A mortgage modification changes the terms of the loan agreement between a homeowner and a lender. The goal of a modification is typically to lower the monthly mortgage payment. The lender may modify the mortgage by lowering the interest rate, extending the loan term, or reducing the amount of the principal. Additionally, if the homeowner is already in default, the lender may agree to add any overdue mortgage payments to the outstanding principal. The overdue payments can then be repaid over the term of the loan or in a single balloon payment at the end of the loan term.
The Home Affordable Modification Program (HAMP). The Home Affordable Modification Program, or HAMP, is a federal modification program that is perhaps the most well-known part of the Making Home Affordable program. HAMP has two Tiers -- Tier 1 and Tier 2.
The goal of HAMP Tier 1 is to lower the monthly mortgage payment of homeowners in danger of foreclosure to 31% of the borrowers' monthly gross (pre-tax) income.
HAMP Tier 2 modifications are available for those who do not meet the eligibility requirements for Tier 1. Specifically, Tier 2 modifications are available for rental properties, to those who previously did not qualify for HAMP because their debt-to-income ratio was 31% or lower, to those who previously received a HAMP trial period plan (but defaulted in their trial payments), or those who previously received a HAMP permanent modification, but defaulted in their payments, and lost good standing.
Ask for help. As soon as you realize that you will have or are having problems paying your mortgage, you should contact your lender or loan servicer (the company to which you make your mortgage payments) to see if a mortgage modification is available to you. You should ask specifically for your lender’s loss mitigation department. You should also contact a HUD-certified housing counselor for free advice and help in working out a mortgage modification with your lender. To avoid falling victim to the numerous foreclosure rescue scams out there, be very careful about paying anyone an upfront fee for help with your modification application.
Submit your mortgage modification application package. Your lender or servicer will ask you for a set of documents which they will assess to see if you qualify for a loan modification. The set of documents you will need to provide will typically include a hardship letter (or affidavit), in which you will explain the unique set of circumstances that have led you to be unable to pay the current mortgage amount and the reasons you will be able to pay the proposed modified mortgage amount. Tips on writing a successful hardship letter can be found in this three part series on getting your mortgage loan modified.
You will also need to substantiate your financial hardship and ability to pay the modified mortgage amount by providing certain financial documents, which may include copies of tax returns, paycheck stubs, a list of debts and assets, and a monthly budget. Different lenders may request a different set of documents; confirm with your lender what documents you will need to provide. To ensure your lender receives every page of your loan modification application, clearly label each page with your name and loan number. Keep copies of everything you submit to your lender.
Stay in contact with your lender or servicer through your single point of contact. In most cases, you’ll be assigned one person (or team of personnel) to work with you through the loss mitigation process.
New federal mortgage servicing rules went into effect on January 10, 2014, that require “continuity of contact” when a homeowner seeks foreclosure alternatives. Under the continuity of contact rule, the servicer must assign a single person (or a team) to assist you if you are looking for a way to avoid foreclosure. (The continuity of contact rule does not apply to open-end lines of credit, reverse mortgages, qualified lenders under the Farm Credit System, any loan that is secured by a property that is not the borrower’s principal residence, and small servicers and certain government agencies.)
Also, the national mortgage settlement, as well as the California and Nevada Homeowner Bill of Rights, require that the servicer appoint a single point of contact for homeowners who are potentially eligible for loan modifications or other foreclosure prevention alternatives.
In addition, Making Home Affordable guidelines state that large loan servicers must designate “relationship managers” to serve as the homeowner’s single point of contact when being evaluated for HAMP. The relationship manager is supposed to communicate and work with the homeowner during the entire modification process. If a modification is denied and the loan goes into foreclosure, the relationship manager is required to be available to respond to the homeowner's inquiries about the status of the foreclosure. While these guidelines apply to the largest servicers, the U.S. Treasury has encouraged all participating mortgage servicers to adopt these guidelines and provide borrowers with a single point of contact. Most have agreed to comply.
Still, once you submit your package of documents, call your lender or loan servicer to confirm that all of the pages of each document were received. Continue to call at least once a week to check on the status of your modification application. Keep careful notes on each contact: How did you contact your lender or servicer? When did you contact your lender/servicer? Who did you speak to? What was the employee’s ID number? What was the outcome of the contact? What action, if any, needs to be taken and by whom?
If you’re unable to obtain a mortgage modification and foreclosure is imminent, you should consider other options to prevent foreclosure, such as short sale, deed in lieu of foreclosure, bankruptcy, or fighting your foreclosure in court.