Ultimate Guide to Loan Modification

Everything you need to know about loan modification

When you cannot meet your financial obligations and your lender agrees to adjust the terms of your loan, they may offer a loan modification package. Some people call it restructuring or a workout plan. Regardless of the name, the intent is to make your loan more affordable.

While you might request a modification for most any type of loan, the loan modification generally relates to home mortgages. The specific terms of the modification vary based on the lender. However, some changes might involve:

  • A new mortgage rate
  • A new, affordable monthly payment amount
  • A extended loan term
  • Legal fees and foreclosure costs incorporated into the new amount
  • Re-amortization of the new amount 

If you’re a homeowner who is underwater on your home loan, you owe it to yourself to investigate carefully whether a home loan modification is right for you.

Determine if Loan Modification is Right for You 

The federal government offers a program to facilitate loan modifications. Called the Home Affordable Modification Program or HAMP, there are benefits to both you and your lender. You get to stay in your home at a reduced cost and the lender gets their money.

However, a loan modification isn’t right for everyone. The people who benefit the most are those who have a steady income and:

  • Face losing their home due to a financial hardship
  • Have a mortgage that is larger than the value of their home
  • Have fallen behind on their mortgage payments and face foreclosure
  • Can no longer afford their loan due to an adjustable rate mortgage (ARM)
  • Have a higher than average fixed interest rate on their loan (2% or more over current market)

To be eligible for HAMP your home loan must have originated prior to January 1, 2009, and have an unpaid balance that is equal to or less than $729,750 (for a single-family home).

Eligibility changes to HAMP as of June 2012 now include homeowners who:

  • Rent or intend to rent their property (not just those who live in their home)
  • Did not qualify previously because their debt-to-income ratio was 31% or lower
  • Received a HAMP trial period plan and defaulted on their trial payments
  • Received a HAMP permanent modification loan and defaulted on their payments

Start the Loan Modification Process

If you feel you might be eligible for home loan modification, learn what you need to know about HAMP and how it may help you.

  • Learn before you apply. Never go blindly into any situation, especially one involving your home and income. Learn what you can about the HAMP guidelines and what your lender offers in the way of assistance.
  • Prepare your HAMP documentation. If you’re thinking that applying for a loan modification is just about filling out an application (Request for Mortgage Assistance form), think again. In addition to supplying evidence of your hardship and proof of all income, you may need to provide:
    • Most recent tax return
    • Completed and signed IRS Form 4506-T or 4506-T  EZ (available from the IRS free of charge)
    • Accounting of all other assets, mortgages, and outstanding balances on credit cards or other loans
    • Dodd-Frank Certification
    • Government Monitoring Data form
  • Contact your lender. Contact your lender and start a discussion regarding the HAMP evaluation process. Be sure to document any conversation you have with your lender.
  • Seek advice from experts. Whether it’s someone you know who has experience with HAMP or loan modifications, an attorney well versed in real estate, or a free HUD-approved counselor. Be forewarned: in some states it is illegal to charge an upfront fee for these services.

Loan Modifications Can Be a Win-Win Situation

Meeting the requirements of HAMP may offer you as well as your lender incentives. These include:

  • Pay for Success Incentives to Servicers. Your lender can receive a $1,000 upfront fee for each eligible modification.
  • Incentives to Help Borrowers Stay Current. You may receive up to $1,000 for every five years that you remain current on your loan.
  • Reaching Borrowers Early. Servicers may receive $500 and mortgage holders may receive $1,500 to modify at-risk loans before borrowers default.
  • Home Price Decline Reserve Payments. The Treasure Department offers an additional insurance payment on each modified loan to discourage lenders from choosing to foreclose on mortgages.

In the end, it benefits both you and your lender to keep you in your home. So take the time to determine if a loan modification is right for you.