5 Things You Need to Consider Before Applying for a Loan Modification

Falling behind your monthly mortgage because of unexpected financial setbacks, medical emergency, or loss in income is inevitable. Because of this, some homeowners turn into loan modification to avoid foreclosure.

However, not all loan modifications are worth all the hassle you would go through. Especially with what’s happening in the finance industry – the big players are taking advantage of less-informed consumers just because they can do so.

For example, just recently, New York’s superintendent of financial services launched an aggressive investigation into Ocwen Financial, one of the nation’s largest mortgage servicers and one that the mortgage industry has placed their high hopes for.

The investigation found out how the company has subjected borrowers to the same abuses as the big banks – improper foreclosures and robo-signing.

This led to a settlement that forced Ocwen’s chairman, William C. Erbey, to step down from his top position. In addition to that, Erbey also agreed to step down as chairman of four other companies. That’s how serious this problem is.

So, here’s what you need to know before you consider modifying your home loan.

1. Know if you are qualified for a loan modification

   To qualify for home loan modification, you would need to have a valid financial hardship and documents to prove it. Some of the acceptable reasons for hardships are getting a pay cut or losing your job. If pay cut is your reason, you should have a copy of your pay stubs showing the income you used to get and the new income you are currently getting.

   Unexpected medical expenses or disability may also qualify as valid hardship.

2. Modification is not instant

   Given that you have all the necessary documents and proofs to justify your hardship reason, the process to modify your loan may still take 2 to 3 months to process. In some large banks, it may even take as long as 6 months.

   It is advisable that when you are anticipating a financial setback like for instance a pay cut, it’s better to process the request for loan modification early. Some people have the impression that modifications happen instantly just because there is an ongoing valid hardship, unfortunately that is not the case.

3. You need to be in good credit standing to qualify

   A borrower needs to be in good standing with his/her monthly payments to qualify for a modification. Good standing means current in their monthly mortgage payment even though there is “hardship” going on.

   Banks will need to see that you are responsible as a borrower and you need to show them that you intend to pay off your mortgage. Otherwise, banks will just deny the modification and will look into foreclosure as they can easily make more money that way.

4. Modification documents

   To expedite the process of applying for a modification on your home loan, you need to have all documents required handy. The basic documents needed to start the modification request process would be a written hardship letter, bank statements (banks prefer the statements mailed to your home over bank statements that are generated online), federal tax returns or W-2s, pay stubs showing significant income adjustment, or medical certificates.

   Keep a copy of these documents handy as they may be requested from you more than once. If you will be submitting the documents at the bank personally, have a receiving copy to signify that you have submitted the complete documents. In case of delay because of incomplete documents, you have proof that you have done your part and provided everything that the bank asked for.

5. Consult a loan counsel and check if modification is the best answer to your current situation

   Some hardships are temporary and may only last for a few months. If this is the case, it is best to consult a loan counsel first to see if modification is the answer to your current financial concern.

   With home loan modification, the bank may lower your monthly payment but the loan term would reset to 25 or 30 years which means you are basically starting a whole new loan over again.

Home loan modification is not an easy process. Every time a bank processes this request, they look into your credit history which at the end may hurt your credit standing.

Also, there’s no guarantee of approval even after all documents have been submitted and all reasons have been validated. Upon approval, there’s no guarantee either that you will receive the interest rate you wanted and the reduction of monthly payment you needed.

So evaluate, research, and ask for help to see if this option is the best for you and your family.

If you want to learn more or need help about load modification, email or call us at 866-4-WAY-OUT for a free 15-minute consultation.