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How to Request a Mortgage Modification
Can you get Mortgage Relief?
Homeowners all across the United States are wondering how to request a mortgage modification. As a real estate lawyer, I get the question frequently! The rules, regulations and practices keep changing, but here's how to determine if you are eligible to either modify your mortgage, or obtain a home affordable refinance.
The bottom line is that you want to avoid foreclosure. If your financial situation has changed since your purchased your home, you may be eligible under one of the government programs. It should only take you an hour or two to gather the appropriate documents and prepare a hardship letter to your mortgage company. And my advice is to do it as soon as possible. With the massive numbers of requests coming in on a daily basis, one company with which I spoke stated that it will take up to 6 months (or more) to approve a . mortgage modification
In the meantime, you should try to stay current on your payments, and pursue other avenues to minimize your monthly expenses, whether by negotiating new terms/payments with your credit card issuers, financing outstanding medical debt, or even simply holding a garage sale or two. Don't let your credit score suffer, if possible.
Also keep in mind that you are not alone. Hundreds of thousands of people are finding that the global recession has significantly impacted their personal finances. Loss of jobs, reduced consumer spending, falling house prices and other cut-backs have hit us right at home. So here's how to protect that most important asset, and hopefully avoid foreclosure in the midst of the financial crisis.
Government estimates are that 7-9 million people may be eligible for some kind of mortgage relief.
What is a Mortgage Modification?
In general, a mortgage modification is when you can get a new loan agreement, and your bank can provide it to you with help from the government.
The bottom line is that your mortgage must require payments of more than 31% of your monthly gross income. The TARP program will allow lowering of interest rates down to a floor of 2% to help you reach that 31% mark. If adjustments down to 2% still leave you at over the 31% threshold, there is the ability to cut your principal balance until you get there.
The potential downside is that homeowners who receive a Loan Modification will be required to pay back to the government 50% of any equity that is acquired when the property sells in the future. It may not be a huge drawback if you want to sell in a few years, but 10-15 years from now, you might lose a big chunk of your original investment - and the gains thereon. In addition, if you qualify for a lowered principal balance, that is considered income to you, which is taxable.
Bottom line: Most people who qualify for a mortgage modification will not owe any less on their homes than what they still need to pay back pre-modification. Simply, your payments will be spread out longer at a lower interest rate. And, its only a 5-year deal. As you make more money, you'll end up paying more again. The amount due each month will be re-evaluated after 5 years.
You may want to consider a consultation with a financial advisor before proceeding.
Do you Qualify for Home Affordable Modification
As set forth at FinancialStability.gov:
The Obama Administration’s Making Home Affordable program will offer assistance to as many as 7 to 9 million homeowners making a good-faith effort to make their mortgage payments, while attempting to prevent the destructive impact of the housing crisis on families and communities. It will not provide money to speculators, and it will target support to the working homeowners who have made every possible effort to stay current on their mortgage payments.
By supporting low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac, providing up to 4 to 5 million homeowners with new access to refinancing and creating a comprehensive stability initiative to offer reduced monthly payments for up to 3 to 4 million at-risk homeowners, this plan brings together the government, lenders, loan servicers, investors and borrowers to share responsibility towards ensuring working Americans can afford to stay in their homes.
Your best bet may be to try to get a home affordable modification (a refinance will cost you money upfront), though there are pros and cons - see box to the right. There are a number of questions that all must be answered in the affirmative if you are to qualify for a home affordable modification:
1. Is the mortgage issued for your primary residence?
2. Do you owe less than $729,750 on your mortgage?
3. Was the mortgage issued prior to January 1, 2009?
4. Are you having trouble making your mortgage payments?
5. Is your payment on your first mortgage (including principal, interest, taxes, insurance and homeowner's association dues, if applicable) more than 31% of your current gross income? If you are not sure, you can use an easy calculator to help you with the math.
Remember, however, that the question is based on GROSS income (pre-taxes), not NET income.
If you can answer all of these questions with "yes," your next step is to contact your mortgage company. You'll have to work with them - not the government! Take a look at your last statement and call the 1-800 number included. Be sure to have your account number handy.
You will likely be directed to prepare a letter of hardship as to why you are requesting a loan modification (more on this below). You will also need to prepare an expense report of all monthly costs for your household, and also enclose at least 2 recent pay stubs. If you are receiving unemployment or severance, you'll have to evidence that, as well. Pull everything together and send it in to your mortage company to the address they specify.
How to get a Loan Modification Approved
Mortgage Relief Information
How to Prepare a Letter of Hardship for a Mortgage Modification
When requesting a loan modification from your mortgage company, you must prepare your case as carefully and professionally as possible. A formal looking letter that includes all pertinent information will be considered seriously. Include the following information: date, address of your mortgage company, your address and a "Regarding" line - this is where you should reference your account number and state that it is a request for loan modification.
If possible, do not hand-write the letter. Print it out from a word processor, or use a typewriter if you do not own a computer.
(your name and address)
(your bank's name and address)
Regarding: Request for Loan Modification: Account __________
Letter of Hardship
Dear Sir or Madam:
Please consider this letter a formal letter of hardship with respect to the account referenced above. We are also enclosing copies of 2 recent pay stubs and an expense report is detailed below, per the instructions from one of your employees.
After visiting the makinghomeaffordable.gov website, we confirmed our potential eligibility for loan modification of our first mortgage on our single-family home, Account _________. Accordingly, we are requesting relief as soon as possible.
[in the next 2-3 paragraphs talk about why you need relief - include every single fact, from layoffs to the state of the housing market in your hometown. Do not hold back! You need to make a strong case, otherwise, you may be wasting your time]
What if you don't qualify for a mortgage modification?
If your mortgage company tells you that you don't qualify for a mortgage modification, you could still look into the TARP program for refinancing. It was crafted to help homeowners in markets in which their home lost substantial value (leaving them upside down on the loan), who want to take advantage of historic low interest rates.
Before we go any further, the refinancing program is ONLY available to owners with loans guaranteed by Fannie Mae or Freddie Mac. If that's not you. Stop. Do not pass go. Do not collect $200 (or any other type of relief!) Sorry.
If you can check off that first box as "yes," then you also have to be current on your mortgage payments (no more than 30 days late), and be "upside down" on the property - owing more than its worth. That being said, your first mortgage cannot exceed 105% of the current value of the property. For example - your property is worth $200,000, but you owe $210,000 on the first mortgage.
Spreadsheet of Expenses for a Mortgage Modification
As part of your request for loan modification, you'll need to include a spreadsheet of expenses. These are the items for which you are financially responsible on a regular basis. For small businesses, your bank may also want copies of recent bank statements.
You may prepare a separate spreadsheet, or just include it within the text of your financial hardship letter. Among items to consider for your entire household are:
1. First and second (or more) mortgages, property taxes, homeowners association dues
2. Life and car insurance payments
3. Estimated monthly medical expenses (doctor visits, prescriptions, dentist, etc.)
4. Estimated monthly fuel expenses
5. Estimated monthly grocery expenses
6. Utilities: cable, wireless Internet, electricity, water, sewer, garbage, natural gas, propane, recycling, telephone (land line and cell)
7. State and local taxes
8. Vehicle maintenance (consider oil changes and all)
9. Clothing and shoes
10. Hair cuts
11. Entertainment (movies, dinners out, books, trips to the coffee store)
12. Credit card payments, student loans
13. Car loans
14. Child support and/or spousal support
15. Payments required under any settlement (lawsuit, medical, etc.)
It is helpful to total up each of these items, and also display a bottom line number of your average, estimated monthly expenses. Compare and contrast that to the amount of money you are bringing home after taxes (net income). I know the government and mortgage companies are looking at gross income, but its nonetheless compelling to show just how far you are falling short.
Summary of Tips for a Mortgage Modification
I have personally heard horror stories of people trying to work with their mortgage companies for relief during this time. It may tempt you to just walk away from the property. Consider that to be a short-term answer to a long-term problem.
While real property is, in fact, an investment, it is best to simply consider it to be a roof over your head and not stress about the loss of value (whether for 1-2 years or over a longer period). Even if you are struggling to make payments, consider that a "solution" may cost you more in the long run.
Nonetheless, if you are draining savings accounts and running up credit card debt to keep paying the mortgage, there are options available through TARP.
Review the information in this Hub and then seriously consider sitting down with a professional that can help you on the way to saving your home, as well as your sanity.
Best of luck!