With many homeowners about to be caught in the avalanche of foreclosures, one potential solution is a loan modification and there are things to know if you consider it. A loan modification is a permanent change in the agreement between you and your lender regarding the terms of your mortgage in order that your mortgage payment becomes more affordable to prevent foreclosure or to reinstate a defaulted mortgage. This is potentially done through modifying your interest rate, the length of the agreement (also known as the amortization period), or your principal amount. Before contacting your lender to work out a loan modification, consider the following:
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1. If you are current on your mortgage, but know due to circumstances such as unemployment, illness, etc, you are likely to face foreclosure, now is the best time to contact your lender. You do not need to wait until you default.
2. Write a letter stating the reasons for your current financial crisis (a hardship letter). It will help summarize things in your mind in order for you to discuss it intelligently and you will likely need to submit this to your lender.
3. Gather documents to show your current monthly income and expenses. You must include any savings you have and what all your current credit card balances are (along with minimum amounts due each month). You will need your last two years tax returns.
Providing these tax returns allows the lender to see where you had interest or other income sources that you may not have reported in other information you gave them. Include any and all information on your mortgage (including first and seconds) and any other debts you carry (such as student loans, car loans, etc).
4. Estimate on your own what is a reasonable amount that you could afford and for how long you can pay given your current circumstances. As an example, with the President Obama loan modification plan that is in place, the goal is for your mortgage payment to be no more than 31% of your gross monthly income. Simply take your combined family gross income (before taxes) per month and multiply it by 0.31 (31%) to get your maximum affordable monthly payment. If you are unemployed and have no sustainable income, it is very unlikely a lender will give you a loan modification because they know you will be in foreclosure within a month or two.
5. Look for and research the current administration's loan modification program online to see if you qualify. For those of you preferring to speak to a counselor through the same program, you can call 1-888-995-HOPE (4673). There is no charge involved, just make sure you have your necessary documents and info listed above. More information about this counseling service and what topics are covered is also available online at hopenow.com and at hud.gov along with a lot of valuable information on loan modification in general. Make sure to only go to reputable websites for your research. Verify what you read with more than one source if it sounds at all questionable.
6. Take detailed notes of every conversation you have with any counselor and anyone with your lender. Include date, time, and what was said. You may need this to refer back to.
A loan modification can be an extremely valuable tool in giving you a way to potentially save your home if you are willing to consider the above and work with your lender. Keep in mind that legally a lender is not required to give you a loan modification. However, currently there is much more incentive for them to do so through the government programs in place and their cost of a foreclosure versus a loan modification.
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