Loan Modification | Mortgage Modification | Loss Mitigation Options

Loan Modification - Alternatives to Foreclosure

The thought of foreclosure is enough to send any homeowner into a panic. But contrary to belief, starting the foreclosure process does mean your at a dead end. From the day you receive your Notice of Default, you always have options, and the earlier you act, the easier it is to get back on track.

The two most common ways to stop foreclosure are a short sale and a loan modification. Both have their own pros and cons, and it's important to choose the right path based on your situation depending on if you plan to keep or sell your home. This guide shows you both options and how they can help.

Loss Mitigation

Loss Mitigation is one of several processes designed to minimize the damage caused by defaulting mortgage loans. Often backed by an attorney or firm, it involves negotiations between the lender and the borrower that binds them to new, more manageable terms. These terms are aimed at preventing foreclosure and lessen the damage incurred by both parties.

Although mortgage loss mitigation has been around for decades, the real estate slowdown has created a larger demand in recent years. Loss mitigation companies now offer a variety of solutions for troubled homeowners. This article discusses two of the most common methods: home loan modification and short sales.

Loan Modification

As adjustable-rate loans shift back to higher rates, many homeowners are finding themselves in financial trouble and facing foreclosure. Fortunately, there’s a new solution on the market: loan modification. Also called a mortgage modification, it lets you work out more comfortable terms with your lender so that you can get current. A loan modification also stops the foreclosure process, buying you more time to get back on track.

One of the main requirements for a loan modification is a hardship letter explaining the nature of your financial hardship. Your reasons have to be valid, such as a medical emergency, job loss, or a death in the family. You also have to present documents that prove your financial capacity, such as pay stubs, bank statements, and tax forms.

It’s also highly recommended to work with a loan modification attorney. Although you can technically work on your own, it can be hard to negotiate without legal representation. A loan modification attorney can help get your file to the top and ensure faster response from your lender. And because they can use lending laws to strengthen your case, you can get better loan modification deals.

Mortgage Modification

People who are facing foreclosure now have another way to get back on their feet. Mortgage loan modification allows them to work out better terms with their lender, and pause the foreclosure process while negotiations are under way. This is especially ideal for people in adjustable-rate sub-prime loans, which have reverted to higher rates in recent years.

The main requirement for a mortgage loan modification is a hardship letter explaining how the borrower fell behind. Common reasons for mortgage loan modification include medical emergencies, death of a family member, and unexpected job loss. Borrowers should also have a source of income, as they have to prove that they can stay current once they get the mortgage loan modification.

A mortgage loan modification can drag on for several months, especially for small lenders whose agents aren’t trained for such cases. To get a better response, it’s best to hire a loan modification attorney who will do the negotiations on your behalf. They can also use lending violations as leverage to get a better mortgage loan modification. Make sure to choose wisely. A good attorney can make all the difference between losing and keeping your home.

Loan Modification Option

The main advantage of loan modification is that you get to keep your home and continue your mortgage on more comfortable terms. It works by changing your mortgage terms to lower your monthly payments, allowing you to afford making your monthly payments again. This option is best for homeowners who have good payment habits but fell behind because of unavoidable hardship.

How it works:

In a loan modification, you work with a loan modification lawyer who will basically guide you through the application. Your loan modification attorney will start by evaluating your case and deciding whether or not a mortgage modification will work for you. It's important to talk to a good loan modification attorney who can completely understand your situation.

Once you're qualified, they'll ask for a few financial documents complete your negotiation package. These usually include proof of income (pay stubs, W2 forms, etc), bank statements, and a hardship letter explaining your request and how you fell behind. They'll go over your documents to see if there are any legal violations (RESPA and TILA) that can be used as leverage.

After that, your application is submitted and your lawyer begins negotiations. This is the main part of the loan modification process. The wait time depends on how your bank responds and whether they make a reasonable offer. Your lawyer will keep negotiating until you reach the best loan modification agreement with your lender.

Finally, a loan modification offer is sent to you for approval. The change can be an extension of your loan term, a shift from adjustable to fixed rate, a lower interest rate, or a reduction of principal. It all depends on your situation and how well your lawyer can negotiate.

How to qualify:

Anyone in financial trouble can qualify for a loan modification. However, each lender has its own standards, and you may want to check with yours to see if you're eligible. In most cases, you'll need at least a source of income and valid proof of your hardship. Examples of acceptable hardship include job loss, illness or death in the family, and military service. You'll need to explain this in detail in your hardship letter so that your bank can fully understand your case.

They'll also look into your financial documents to see if you can handle your loan once it's modified. It's best to have at least two months' payment saved up by the time you're approved, and an emergency fund to cover up in case you fall behind again.

Why Use A Loan Modification Attorney To Negotiate ?

Wouldn’t it be great if you could just walk up to your lender and say “Please lower my payments” or “Please restructure my mortgage”? That’s basically how loan modification works—except for the walking up part. Sure, technically you can get a loan modification without help, but it won’t be easy. The fact is that lenders are hard enough to deal with, and more so if you’re on your own.

Lenders are difficult for two main reasons: first, you get different answers from different service reps every time you contact your lender; and second, they are not set up to help you unless you already know exactly what they want. To get the best loan modification deal, you need legal assistance. Read on to find out how a loan modification attorney can help you get real results from your bank.

1. They know your needs. A loan modification attorney will look at your case from a legal point of view. They know the right way to approach your lender, and they’ll help you prepare your application for speedier processing. When you present your case, you’ll be armed with all the supporting documents and the right negotiation techniques.

2. They get better deals. Lenders will take you more seriously when you have a professional by your side. Essentially, your loan modification attorney will be vouching for you. Because they can use legal information as leverage, the modifications they can get are much better than you can get on your own.

3. They have long-term relationships. A good loan modification attorney has established contacts with most of the major lenders. Combined with a good track record, this network helps them get better rates and gives them more options. Your lawyer can get you more attractive offers, such as a lower interest rate, principle balance reductions, or even an extension of your loan term.

4. They can buy you time. If you attempt a modification on your own, there’s a good chance you’ll be passed around from one department to another without really moving forward. And if you’re already facing foreclosure, you can’t afford to waste time. A lawyer can stop closure even while it’s under way, giving you more time to recover your finances while they work on saving your home.

A loan modification is much like going to court: you can save your money and get a court-appointed lawyer, or you can invest in professional representation and get the best mortgage assistance. Mortgage modification won’t happen overnight, but if with a capable lawyer, you can be sure you’re in good hands.

Loan Modification Company Selection

With the serious need that many homeowners now have for relief from high adjustable rate loans, looming foreclosures, and mortgage loans higher than the home's value, many opportunistic companies have jumped onto the loan modification bandwagon.

Many of these companies are legitimate; however there are a number of scam artists and boiler room operations who are taking money from people who are in need of real help, and not delivering on their promises.

How do you determine which Loan Modification Company is genuine, and who you can trust with the most valuable asset you have, which is your home.

Here are some questions you should consider before contracting with a loan modification company:

1. What type of company are they? Are they a law firm, or a broker, or independent processing company?

Only a law firm is bound by a tight set of legal and ethical rules that brokers and others do not have to follow. You should always do a thorough background check before you give money to anyone who wants to modify your loan.

2. How long has the company been doing modifications? Do they provide other services?

You should only deal with a law firm that has extensive experience in real estate law, and dealing with financial hardship matters for at least 10 years. Only an attorney can act on behalf of a homeowner who has received a Notice of Default.

3. Is the company licensed or bonded?

Do not deal with anyone who is not licensed by the state and bonded.

4. Is there a written contract that spells out exactly what the company will do?

You must receive full disclosure, prior to making a commitment, about all actions that will be taken on your behalf.

5. Does the company have a Dept. of Real Estate approval to collect fees for loan modification?

If a company has not been certified to collect fees upfront you should be very suspicious of their status.

6. Does the company negotiate directly with the lender or do they out- source this function?

Many companies farm out processing of your modification and do not have real control of the process.

7. What kind of evaluation is done of your situation before asking for money?

Your specific situation and objectives should always be reviewed by an experienced and knowledgeable attorney before a decision is made to proceed. An ethical company will not take a case unless it meets the basic criteria for a successful modification.

8. Does the company guarantee specific results?

If any company does this you should not just walk away, but run away immediately. No legitimate company can guarantee what a lender will or will not do.

9. Does the company provide regular updates on the progress of your modification after the process starts?

This should be spelled out in your contract along with a specific individual who will be your contact for questions, etc.

It is crucial that you do your homework and ask the right questions before committing to pay for service that can have such a significant effect on your home ownership.

How to write a Hardship Letter for Loan Modification ?

A financial hardship letter explains to your creditor why you are in financial trouble and requests a specific remedy to help you through the crisis. There are different reasons for writing a hardship letter, but the most common these days are:

  • Requesting a loan modification or restructuring
  • Requesting a short sale to avoid foreclosure

The hardship letter is a primary requirement in the loan application process. Your loan modification attorney will ask you to submit it along with your other financial documents, so that they can evaluate your situation and present a strong case to your lender.

When writing a hardship letter for a loan modification, keep in mind that the lenders really want to see why you have fallen behind with your mortgage payments. It should be clear, honest, and contain just the right amount of detail. The way you write it can literally spell the difference between keeping and losing your home. Here's how you can write a hardship letter that puts your point across and gets you the best loan modification deal.

Keep it concise. A typical lender can only spend five minutes reading your letter. Try to keep it to a single page; any longer and they might not have time to really read it through. Lose all unnecessary details and keep only those that are relevant to your case.

Get straight to the point. Start by stating the purpose of your letter (whether it's a loan modification or a short sale), so that the reader knows outright what to expect. Basically, it should say "I need you to buy my home/restructure my mortgage/give me a lower interest rate," in a way that compels them to find out why. You can use the succeeding paragraphs to explain it in more detail.

Explain your hardship. First, make sure your problem actually qualifies as a financial hardship. Your goal is to convince your bank that you have no other means of mortgage assistance, and that you can get back on track if they do grant your request. Examples of valid hardships include:

  • Loss or reduction of income (loss of employment, demotion, etc.)
  • Natural disaster
  • Illness and medical expense
  • Death of a family member or co-borrower
  • Divorce, separation, or other legal expenses
  • Military service

It doesn't have to be one of these things, of course. Each lender has its own standards, and the letter's purpose is to give them a more personal look into your situation. Once you've established your hardship, provide details that will help strengthen your case. Make sure to tell them how you got into the situation and why it's out of your control.

Restate your request. End your letter by reiterating your purpose, in slightly different words. Ideally, your previous paragraphs should explain that it's the only way to stop foreclosure. Make it clear that you intend to get back to your regular payments once the loan has been modified.

Be humble. One thing you should never do is imply that your situation is your lender's fault. Instead of pinning the blame on anyone, simply tell things as they are and leave the judgment to your reader. Finally, thank them in advance and mention that you're looking forward to continuing business with them.

Short Sale Option

A short sale is when you sell your home and your bank agrees to receive the proceeds, even if it's less than the amount owed on the loan. The drawback is that you still lose your home, and your lender can give you a tight time frame in which to find a buyer. A short sale is still damaging to your credit, but it's easier to clean up than a foreclosure which stays on record for up to ten years.

How it works: The short sale process starts when you contact your lender and make your proposal. You may want to contact a lawyer beforehand to help you talk to your lender, and help you map out your selling plan. Once your lender has agreed to the sale, you will issue a letter authorizing them to release information about your mortgage and property to investors or potential buyers.

The details are presented in a document called a settlement statement. This includes the proposed selling price, remaining balance on the mortgage, and all associated expenses such as commissions and closing costs.

As with a loan modification, you will also need a hardship letter explaining your situation and what kind of mortgage assistance you want. Your bank will verify your claims using standard financial documents, which you will also provide. When you've been properly assessed, your lender will contact a third party (usually a broker) to examine your home and verify its market value.

Once you find a buyer, the short sale takes place and the proceeds go to your lender. The rest of the loan is written off, so effectively you're getting a discount. Note that the savings can be taxable. Check with a lawyer and accountant to see if there are any liabilities.

How to qualify: The requirements for a short sale can vary from lender to lender. Most of them have to do with your type of hardship and the market value of your home. Before applying, check your local listings to see if your home's market value has dropped. It should be worth less than the balance you owe your lender. You should also have a valid hardship that can be verified in your financial documents.

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