Loan modifications are complex transactions that take time, persistence and patience to execute. Banks must make a thorough review of the borrower's situation in order to be sure that the homeowner can repay the modified loan. Borrowers should do their homework, hire compentent and experienced representation, and understand the basics of this process before contacting the lender.
Q: What IS a "Loan Modification"?
A: A "Loan Modification" is NOT a "refinancing" or a "new loan", but rather a voluntary agreement negotiated with a lender that modifies the terms of an existing mortgage loan contract. Changes can be made to interest rate, principal, length of loan or other terms.
Q. What is necessary in order to obtain a Loan Modification?
A. There are several factors that a lender will review to determine eligibility:
(i) Hardship: This includes the loss of a job, change in marital status, reduction in wages, death, illness, etc. The bank bank must have reason to believe that, despite the hardship, the borrower will be able to make the modified payments.
(ii) Ability to Pay: Past payment history and the ability to recover from the hardship will be considered here.
(iii) Net Cash Flow: Lenders use this to determine if the borrower will have the funds to repay the loan with the modified terms.
(iv) Fixed vs. Adjustable Loans: It is easier to modify a loan with adjustable terms than one without.
(v) Interest Rate: Higher rate loans are being modified more frequently than lower rate loans.
Q: How Long Does A Loan Modification Take?
A: This question is not an easy one to answer. There too many variables. Some things that impact the duration include having properly completed paperwork, providing supplementary documentation in a timely matter, fully disclosing all income and expense sources at the beginning, having a verifiable hardship, and vigilence and persistence on the part of the homeowner.
Each lender and servicer can have different requirements and procedures that can impact the time it takes. While some people have received loan modifications in as little as two to three months, some take as long as nine or ten months.
Q: Will the Lender or Servicer Include Late Charges in the Modified Loan?
A: HUD states that accrued late charges "should" be waived by the lender when the loan is modified. This varies depending on the lender. However, borrowers can request a complete breakdown of fees and penalties.
Q: Will Missed Payments Be Added Back Into the Modified Loan?
A: It is reasonable to expect that past-due payments can be added to the new loan balance. Lenders make this determination on a case by case basis based on several factors.
Q: Can Loans which are "Current" Be Considered for Modification?
A: Many lenders will accept applications from borrowers facing hardship who are not yet behind in their payments. In this case, homeowners must prove that a hardship or pending interest rate increase (otherwise known as "imminent default") will prevent them from making a payment.
Q: What About Loans With a Prepayment Penalty?
A: Part of the request to modify should include asking the lender to waive the prepayment penalty. Having this adds to the complexity of the request but will not prevent a lender from considering or completing the loan modification.
Q: What Types of Hardship Will Be Considered?
A: Lenders and servicers typically consider divorce, separation, death of a spouse or co-borrower, death of a family member, loss of income, extended illness, job relocation, and military service as reasons to modify a loan. The hardship letter should supply all of the important facts in a logical manner and illustrate in a compelling manner why the hardship should be considered.
Q: How Will a Loan Modification Affect Credit Scores?
A: Loan modifications can be reported to credit bureaus as unsatisfied debts. In addition, during the modification process the lender may divert a portion of the payments to a loss mitigation account so the loan may be reported as 30-90 days past due during that time. If the lender pulls a credit report, that could also impact the FICO score.
(EDITOR'S NOTE: For more information on the impact a "Loan Mod" has on a credit score - and ways to "lessen" the impact" - see the article "How do Loan Modifications Affect Credit Scores?", published on this blog in early December, 2009).
SUMMARY: A loan modification is a change in the terms of the contract between the borrower and the lender. Lenders and servicers will require accurate documentation to be delivered in a timely manner. If there is concern that there was fraudulent or illegal activity when the initial loan was issued, homeowners should contact a competent law firm to review the documents. If there was a violation or fraud, homeowners should contact the appropriate government agency to file a complaint.
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