When a borrower is able to renegotiate the terms of his or her current mortgage, this is call a loan modification. The borrower may be current, late, in default, in foreclosure, or in bankruptcy when applying for a loan modification.
A loan modification will typically result in the change to the loan’s monthly payment, interest rate, length, or outstanding principal balance.
Requirements include demonstrating financial hardship while also showing that the borrower has the capacity to continue to pay for the mortgage.
A borrower is a candidate for a loan modification if he/she:
1. Wants to continue to live in the house
2. Has experienced a demonstrable financial hardship
3. Has income/employment and thus able to keep paying in the mortgage
Examples of hardship
Loss of income
Illness, accident, or serious medical issues
Death of the family
Increase of family size
Other circumstances beyond your control that cause financial problems
Lenders and servicers receive government incentives for participating in loan modifications. Note that all lenders and servicers have different policies covering loss mitigation.
Lenders are looking at their financial bottom line. Foreclosure is an expensive process, and often it makes more sense monetarily for the lender to accept a short sale than to foreclose.
The key to a loan modification is striking a balance between your income and expenses. Borrower must demonstrate that he or she cannot afford the current loan terms, but is otherwise a qualified borrower for other loan terms. In essence, you must show that even though you can’t afford your current payment, you are still financially able to afford a substantial payment.
Being a borrower in the position of trying to convince the bank that you cannot afford one particular payment, but that you can afford another, is a bit of a catch-22 situation. Having an attorney speak with the lender on your behalf may make striking this balance easier to achieve.
A mortgage may be modified to:
1. Reduce or change an interest rate
2. Reduce principal
3. Increase loan repayment term
4. Reduce penalties and late fees
Government program: HAMP
Home Affordable Modification Program (HAMP) is intended to help homeowners at risk of foreclosure by having lenders lower borrowers’ monthly mortgage payments. The HAMP Program is part of the Making Home Affordable Program which was created by the Financial Stability Act of 2009. HAMP creates standard loan modification guidelines for lenders to take into consideration when evaluating a borrower for a potential loan modification.