A loan modification is a change to one or more of the terms of the loan to make it more affordable for the borrower. Generally speaking, most lenders require a borrower to be behind on his mortgage payments before they will consider a loan modification. However, because of the rise in the foreclosure rate, some lenders are now willing to modify a loan based on a borrower’s anticipated hardship. If your lender has engaged in any illegal activity with regard to your loan, you may be able to use it as leverage to force the lender to modify your loan.
Lenders make loan modification decisions on a case by case basis because each borrower’s situation is unique. If you are seeking a modification, you must demonstrate to your lender that you have fallen behind or anticipate falling behind on your payments as a result of some hardship. Acceptable hardships include death of a co-borrower or spouse, job loss, divorce, illness, job relocation, and military deployment. You will be required to submit a detailed hardship letter to your lender as well as tax returns, bank statements, pay stubs, and other documentation that supports your claim of financial hardship.
Your lender’s primary concern is your ability to make the modified loan payments. If you are unable to demonstrate an ability to pay the modified payments by producing a financial statement that reflects your income and expenses, your modification request may be denied. This is critical if you are unemployed or under-employed.
If your lender approves the modification, in most cases, the delinquent amount will be added to your principal. However, your lender may expect you to make a lump sum payment as both a show of good faith and an evidence of your ability to make the modified loan payments. Additionally, your lender will complete an escrow analysis to ensure that enough money is being collected to cover the property taxes and insurance. If you don’t have an escrow account, as a condition of the loan modification, your lender may require that you establish one. If this is the case, you will be required to deposit two to three months worth of escrows to establish the account.
Forbearance is a short-term modification. If you are a couple of months behind on your mortgage payments due to a short term hardship, your lender may allow you to pay the delinquency over a few months while continuing to make your regular monthly mortgage payment. For example, if your mortgage payment is $500.00 per month and you are two months behind, your lender may allow you to pay $750.00 per month for four months to bring your payments current. Once you’ve cured the delinquency, your monthly payment would return to $500.00.
One problem with loan modifications and forbearance is that many times, the borrower never receives anything in writing evidencing the agreement. Sometimes, because the lender’s left hand has no idea what the right hand is doing, foreclosure proceedings will be initiated even though the borrower is making the payments under the terms of the modification. For this reason, it’s important to insist that your lender provide you with a written modification or forbearance agreement that requires your signature. After you sign it, you should keep a copy of it for your records.
You must also understand that a loan modification or forbearance request gives your lender the opportunity to revisit your loan application. If your lender finds any discrepancies in your original loan application as compared to the financial statements and other documentation you submit in support of your modification or forbearance request, you may be accused of mortgage fraud and this could be used against you in the lender’s suit to foreclose and it could result in criminal prosecution.