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How does a Loan Modification Work?

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A loan modification is a change to the terms of a loan agreement that is mutually agreed upon by the lender and the borrower. Since the housing crisis began in 2007 the number of homeowners in the U.S. who are in danger of foreclosure has skyrocketed. Loan modification can be a viable method for avoiding foreclosure and staying in your home. Unfortunately, getting a loan modification is a difficult process and there are plenty of scams and crooks out there trying to take advantage of vulnerable homeowners. The majority of homeowners don't know how a loan modification works so education is the first critical step. Here is an overview of how a loan modification works and some helpful tips to help you get the process started and some things to watch out for.

Loan Modifcation on Your Own vs. Using a Third Party

First - you should plan on attempting to get your loan modified on your own by working directly with your lender. You should only need a 3rd party firm or attorney as an absolute last resort. Find out if your mortgage lender is part of the government's "Making Home Affordable" modification program. If they are then the lender is expected to follow certain guidelines and rules - in return the lender may qualify for an incentive payment from the government if your loan is successfully modified. In order to be eligible for the government program the home in question must be your primary residence and you must:

  1. Spend more than 31% of your income on monthly housing costs
  2. Already be delinquent or able to show imminent danger of default

Getting Started

Your plan of action should be the same whether your lender is part of the government program or not. Your first step should be to put together an extremely detailed accounting of your current income and all expenses as your lender will require this documentation. Loan modifications are not handled by the collections department at your servicing company (the folks who have certainly been calling if you are delinquent on your mortgage). Loan modifications are usually handled by the loss mitigation department. You will need to get in touch with a loss mitigation specialist or modification specialist in order to get the process started. Keep in mind that the loss mitigation departments at the major U.S. banks are completely overwhelmed by a massive number of requests for loan modifications so you will need to be extremely persistent and assertive if you expect to get the attention you need.

Your goal in the loan modification process should be to get your payment and interest rate lowered. Getting your principal balance (amount owed) on your mortgage lowered is not usually an option. Your bank may try to get you to agree to another option aside from loan modification such as forbearance. This option is generally in their best interest but will not be the best course of action for you. Keep in mind that the loss mitigation specialists are looking out for the financial interests of the lender first and will try to get as much money out of you as they can. You need to be your own advocate and fight for the modified terms that you can live with. If your lender is part of the Making Home Affordable program then you will be required to sign a loan modification agreement and you will be required to participate in a 3 month trial period with the new loan terms in effect. The 3 month trial period is essentially a probationary period where the lender is looking to see if you can make your newly lowered payments on time. If you successfully complete the trial period then you can finalize the loan modification with your lender.

When to Enlist the Help of a Third Party

If you have tried everything and your lender will not agree to modify your loan or perhaps they won't even talk to you about it or return your calls then it would be wise to enlist the help of an attorney or loan modification service. However, if you go this route you need to be extremely careful as there are an abundance of scam artists out there who will take fees from you up front and then completely disappear on you.

Here are some tips for picking a 3rd party to help you with your loan modification:

  • Check with the Better Business Bureau and RipoffReport.com to see if there are complaints about the attorney or firm you are considering
  • Get references so you can talk to some clients that they have helped successfully
  • Do not pay them anything upfront, you should be able to find someone who will help you and only get paid if your loan gets modified

Stay persistent and don't give up. The good news is that thousands of Americans are finding that loan modification can be an effective way to prevent foreclosure and keep the home that you've worked so hard for.