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Beating the Odds: Successful Mortgage Loan Modification


Treasury Department officials announced recently that more than 900,000 homeowners have signed up for trial modifications, but only about 15% of them have been converted to permanent loan modifications. If you're in a trial modification program, here's how to get yourself into that 15%.

Understand Where Your Mortgage Lender is Coming From

Mortgage lenders don't make loan modifications out of the goodness of their hearts. Simply, a lender agrees to modify your loan when your default is more expensive to him than a modification would be. The lender's legal obligation is to its owners -- or shareholders -- meaning its decisions have to be the most profitable they can make. So if you want a permanent loan modification, you have to prove that it's in the lender's best interest to grant it. The following circumstances increase your chances of getting a modification.

  • You have little or no home equity. If this weren't the case, the mortgage lender could foreclose and get some or most of their money back immediately.
  • You meet HAMP guidelines. If you meet HAMP requirements, the lender is eligible to receive cash incentives for reducing your interest rate.
  • Your resources are limited. If you have savings that you could use to continue to pay your mortgage obligation, you are less likely to seek help from the lender. And if you do, they are less likely to consider a mod until your resources are exhausted.
  • Your hardship is not something you have control over. If you're in financial trouble because you have a pattern of far outspending your income, your mortgage lender is likely to be less sympathetic.
  • You provide the required paperwork. The lender has to have a complete file or they can't get HAMP subsidies for your loan workout, and many tens of thousands of trial mods have failed from a lack of proper documentation

Loan Modification Mistake: Don't Stop Making Your Payments to Qualify for One

It's a common misperception that you have to be at least 60 days behind on your mortgage to qualify for a loan modification under HAMP. The Making Home Affordable Web site states, "Responsible borrowers who are struggling to remain current on their mortgage payments are eligible if they are at risk of imminent default." That risk is defined as an unaffordable increase in the mortgage payment, a significant reduction in income, or other hardship (like illness) that makes it impossible to pay your mortgage. You have to document your income and expenses in order to prove the hardship.

All that voluntarily withholding your mortgage payment accomplishes is putting you at greater risk for foreclosure, ruining your credit, and causing you to incur late charges and fees.

Get Your Loan Mod Paperwork Together

Lenders say that getting documentation of hardship, income, debts, and assets from homeowners is like pulling teeth. Yet, you can't get a permanent mortgage modification without presenting your case correctly.

One volunteer organization in Chicago has been working on a pilot program as a liaison between borrowers (who often face language barriers) and the bank's loan modification staff. The volunteers help homeowners provide documentation and understand why the process takes as long as it does. In a PBS Nightly Business Report story, volunteer Donna Stites explained: "They would be missing information so they would have pay stubs from six months ago, but not recent pay stubs. They wouldn't have the right tax forms. They wouldn't have income information from every working adult in the household."

When you get a list of required documents from your lender, be sure to read it carefully. Provide exactly what's asked for -- if they want all pages of your bank statement and you've thrown out the last page, get a complete copy from your bank. If they want three months of statements, don't just send in two. If they want copies of your tax returns, provide the returns for the dates needed and sign the copies. Wells Fargo & Co. said 10% of its mortgage borrowers who have made the required trial payments have provided no documents at all, and another 15% sent in incomplete packages. That's 25% who are disqualifying themselves from a loan modification. Get help if you need it from either a housing counselor, friend, or an accountant.

Follow Up

This is probably the most frustrating part. When you fax or mail documents -- certified, return receipt requested -- to the mortgage lender, follow up with a call to make sure they have been received and are correct. Put your case number on everything. Keep notes of every conversation -- the date, whom you spoke with, and what you spoke about. Keep a file of everything you sent and all your notes. Ask for an ackowledgment -- written or email -- from them of your contact.

Make Your Modified Payments on Time

One problem reported by the Treasury Department is that only 75% of homeowners make their new payments on time for the three-month trial period. That's a quick way to get your permanent modification denied. Make plans to send payments with as much time before the due date as you possibly can.

It's Worth It

For those who received a permanent modification, the median monthly payment dropped from $1,419 to $830, the Treasury Department said. In many cases, the new mortgage payment is less than it would cost to rent the house. That's certainly worth jumping through a few hoops, being diligent, and responding promptly.

Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.

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