What is Mortgage Loan Modification?

A mortgage loan modification is a permanent, material change to one or more terms of your original loan agreement. People who are behind on mortgage payments or already facing foreclosure can attempt to negotiate a loan modification with their lender on their own or with a lawyer's help. In these cases, you and the lender agree to permanently modify one or more of the terms of the mortgage contract to make your payments more affordable.

The aim of modifying a mortgage is to eliminate arrearages and to reduce your monthly payment down to a manageable amount. This manageable amount should be something that you can envision paying on time, every month, for the duration of your mortgage term.

Loan modification is typically used in cases where a difficulty exists in meeting the payment obligation. The borrower(s) may have suffered setbacks in the form of reduced income, health issues, or other impairments that do not completely destroy the ability to pay, but significantly hamper it.

Loan modifications can include options such as:

  • Refinancing
  • Lowering the interest rate
  • Extending the terms
  • Adding missed payments to the mortgage balance

There are also government loan modification programs, including:

Whether you choose to attempt a loan modification by yourself, with a lawyer or through one of these programs, your lender must agree to the modification.

Qualifying for Loan Modification

To qualify for a loan modification, the borrower must be at least three months behind on their monthly payments. Once that has been satisfied, borrowers can attempt to work with their lender in providing the proper paperwork and documentation necessary to evaluate the borrower’s candidacy for a modification.

Should one be approved, the arrearages can either be forgiven altogether, or spread out over the term of the modification. Most often, the term of the loan is extended and the arrearages are tacked on to the end. However, in the case of FHA loans, the term cannot be extended past 10 years after the original date, or 30 years – whatever happens to be less.

Depending on your financial circumstances, HUD may require borrowers to complete a trial payment plan before making the modification permanent. These payments might be the same or less than what the final modification amount will be.

Among the reasons HUD might seek a trial payment plan:

  1. borrower has been delinquent 2 or more times in the last 12 months;
  2. loan originated less than 14 months earlier;
  3. borrower did not complete a HAMP trial;
  4. lender wants assurances that borrower will maintain regular payments.

Legal costs can also be lumped in with the loan provided the fees and costs are for work that was actually completed up until the dismissal of the foreclosure case. However, late fees maynot be lumped in. Moreover, any fees that are lumped in must be customary and reasonable.

If you are on a trial payment plan, the lender cannot commence a foreclosure action. If your lender has commenced a foreclosure action against you while you are on a trial payment plan, contact EV Has, LLC immediately to examine your options and defenses.

Getting Approved for a Loan Modification

Loan modifications are rarely granted because foreclosure is the quickest and often times more lucrative remedy for lenders in the case of default. We have found that as few as 5 percent of loan modifications actually receive approval from the lender; the rest are denied.

In order for a loan modification to be considered, and some people see the process as one merely for theatrics, there is an extensive review process by the servicers. Prior to the modification, the mortgagor is entitled to interior inspections of the property to ensure the property is free from conditions that would hamper the ability to honor the terms of the mortgage agreement.

Because the goal of a loan modification is to give the mortgagor a fresh start on the loan with terms that are more amenable to them, late fees are generally waived.

The loan note rate is lowered to whatever the current market rate or sometimes lower. The current rate is measured on the date the mortgagee approves the loan modification.

The total amount due under the loan is re-amortized over a 360 -month period or longer which begins from the due date of the first required installment under the modified mortgage note.

Where a change in circumstances has necessitated a loan modification, mortgagees will review all the variables contributing to mortgagor’s financial position to determine whether surplus income exists and is sufficient to meet the new mortgage requirement but is not sufficient to pay back the arrears. Sometimes servicers will consider additional household income from an employed member of a household who may not have been a party to the original, where the original contracting parties lost work or encountered financial hardship.

Is Loan Modification a Viable Alternative to Foreclosure?

Loan modifications may sound like an appealing alternative to foreclosure, but they are not as straightforward as they seem. If you are considering modifying your mortgage, talk to an attorney first.

At EV Has, LLC, we can discuss residential and commercial loan modifications with you. After reviewing your information, we can make a recommendation about loan modifications and additional foreclosure defense options. Click Here to email us at inquiry@foreclosuredefenselawoffice.com or call us at (312) 775-0980 today for a free evaluation.

Related Resources