Getting a Loan Modification

If you've become unable to make your mortgage payments, a loan modification may be possible.

Who Qualifies for a Loan Modification?

There is no law that specifically states, "This person qualifies for a loan modification, and that person does not." However, there are guidelines and certain criteria that most lenders look for when considering a borrower for modification. These are:

  • Valid economic hardship. A valid economic hardship is caused by unavoidable circumstances or events outside of the control of the borrower. There are many types of valid economic hardship. See our article Steps to Get a Loan Modification: Part II.

  • Ability to pay. Lenders want to see that the borrower has some source of regular income, although the amount of income may be less than what it was earlier. A borrower with a reduced income may qualify for a lower monthly payment. A borrower who has resumed earning income after a period of unemployment, during which the borrower fell behind on mortgage payments, may also qualify for lower monthly payments.

  • Fallen property value: little or no equity. An underwater mortgage (where the value of the home is less than what is owed on the mortgage) makes refinance impossible and can make foreclosure commercially senseless.

None of these criteria are set in stone. They are merely the criteria generally considered by lenders. Ultimately, you are seeking a new deal--one in which the financial numbers make more sense for both parties.

If Loan Modification Is Not an Option

If you have no realistic likelihood of making even smaller mortgage payments soon, you may want to begin considering a short sale or, if a short sale doesn't work out, a deed in lieu of foreclosure agreement. The bright side of a short sale or deed in lieu of foreclosure is that you can get out of paying for something which is worth substantially less than what you owe for it. However, you could be on the hook for a deficiency judgment. (Learn more about deficiency judgments.)

Short Sale

In a short sale, your lender agrees to stop the foreclosure while you list the property and attempt to sell it. When an offer comes in, you present it to the bank and offer the sales proceeds amount (though “short” of the full loan amount) in exchange for a release from the mortgage obligation, preferably without your owing the difference, known as the deficiency. There may also be tax implications after a short sale.

See this article on Using a Short Sale to Avoid Foreclosure for more information and associated risks.

Deed in Lieu of Foreclosure

If a short sale isn't successful, you can offer the lender a deed in lieu of foreclosure by signing the property over to them in exchange for a release from the mortgage obligation. As with a short sale, you should have your lender release you from any obligation to pay the deficiency; get this release in writing as part of your deed in lieu of foreclosure agreement. There may also be tax implications from any release.

A three-month short sale attempt is sometimes required by lenders before they will start negotiations on a deed in lieu of foreclosure. In both a short sale and a deed in lieu of foreclosure, as well as a loan modification, you will have to deliver to your lender as part of your application a hardship letter (or affidavit) and other information for your lender to review.

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