What is a Loan Modification?

A loan modification is much like a mortgage refinance in that the objective is to find you a more affordable mortgage payment for your financial situation. In fact, it is often called a modified refinance. The primary difference is that instead of looking for a “new” loan you will just simply “modify” the terms of you existing mortgage.

Why a Loan Modification Versus Refinancing My Mortgage?

Refinancing your existing mortgage to obtain a more affordable mortgage payment could still be an option. Unfortunately, for an increasing percentage of homeowners it is not. That is precisely what loan modifications are for, the homeowner that has incurred a financial hardship that prevents other mortgage financing or payment options.

In most cases, a loan modification is recommended to homeowners that have a financial hardship that is preventing them from making their monthly mortgage payments. Most how are eligible for these types of mortgage modification programs have already missed one or more payments.

Am I Eligible for a Loan Modification?

This will vary depending on who services (i.e., who you send your mortgage payment to each month) your mortgage. However, most follow very similar qualification criteria. These are the most common loan modification qualification standards:

• Experienced a documented hardship or change in financial circumstances
• Missed three payment (90 days delinquent) or more
• Owns and occupies the property as a primary residence
• Not filed bankruptcy

Other important factors that can effect your eligibility:

• Do not purposely default to get a loan modification
• Make sure you are responsive in working with your lender

Since many of the programs do vary in how they work, you should contact your lender and advise them of your hardship and get more information.

Where Do I Get a Loan Modification?

Ultimately, the only place where you can get a loan modification is with the lender or servicer that current holds your mortgage. Confused as to who this might be? In this mortgage market, where mortgages are bought, sold, and packaged up into securities for Wall Street, this part can be the hardest step in the loan modification process.

The best place to start is your mortgage coupon book or statement–who do you send your mortgage payment to each month?

Each mortgage lender or servicer will have different loan modification programs and processes. In addition, often the staff at these companies have little training to handle a loan modification inquiry.

This is where getting a loan modification can become very challenging. Seeking expertise in streamlining your loan modification process can often save you a lot of frustration and money.

What Do I Need to Show the Bank?

The bank ultimately is in the business to return a profit to their shareholders, just like any other business. Consequently, your objective in presenting your loan modification request is to show that it is in the best interest of the bank to modify your loan.

What might support your modification request? Here are the points that you should be able to show your bank:

• You have had a material change in your financial circumstances
• You have made every effort to make your mortgage payments
• You have been cooperative and responsive in working with them
• You are not in any way purposefully defaulting to get a loan modification
• You are willing to be open, honest, and provide all necessary documentation

Remember your bank is essentially making a new loan to you after taking a loss on the first one. You need to demonstrate to the bank that you are able to pay on the new modified loan terms.

What Documents Will I Need?

Your loan modification package is going to be the most important part of your mortgage modification efforts. Again, the contents and process for packaging the information for your lender’s consideration will vary, but the critical elements are typically the same. Here is an example of the documents you will probably require:

• A letter documenting and explaining your hardship
• Proof of current income and capability to make modified loan payment
• Detailed monthly expense report or budget

The principal purpose of the loan modification package is to provide your lender with sufficient documentation to evaluate the risk in modifying your mortgage. The main question your lender is trying to answer is can you pay the new modified mortgage payment, and will you.

Why Would a Bank Modify My Mortgage Loan?

Simply because it is in the best interest of the bank. As you attempt to inquire about a loan modification do not confuse this transaction with an altruistic act of kindness. It is fundamentally a transaction that makes more business sense than the alternative–you defaulting on the entire mortgage and costly foreclosure proceedings.

It is also a product of the current economic conditions. There are so many homeowners that have been pinched by the simultaneous collapse of the housing market and the economy. This creates a unique circumstance–modifying your mortgage, to keep you in your home, benefits the bigger economic picture.

Loan Modification Programs

As mentioned before, loan modification programs are just becoming mainstream and therefore there is little standardization. The details of loan modification programs that you qualify for will start at your lender or a loan modification counselor that can guide you.

Here are a few of the most prevalent loan modification programs and resources:

White House/Treasury Loan Modification Program

The Obama administration, under the guidance of the US Treasury has created one of the most inclusive loan modification programs to date. This mortgage modification program not only helps borrower in current financial stree, but also good paying homeowners that think they may have challenges in the future or have lost significant equity in their homes due to the housing market crisis.

You can learn mor about this program at: FinancialStability.gov-Making Home Affordable

IndyMac Federal Bank Loan Modification Program

IndyMac Bank was one of the first financial institutions to broadly offer loan modifications to their mortgage customers. When the FDIC took over IndyMac it became the first test bed for an extensive loan modification policy. You are eligible for this loan modification program if IndyMac Federal Bank holds or services your mortgage.

You can learn more about this program at: FDIC Loan Modification Program for Distressed IndyMac Mortgages.

Federal Housing Finance Agency Loan Modification Program

The most recent of the loan modification programs was the one offered by the Federal Housing Finance Agency (FHFA), the supervisory regulator of Fannie Mae and Freddie Mac. This loan modification program applies to any mortgage held or serviced by Fannie Mae or Freddie Mac.

You can learn more about Fannie Mae and Freddie Mac loan modifications in FHFA Director Lockhart’s Statement on Loan Modification Program [PDF]

Major Lender’s Loan Modification Programs

The largest banks in the US are all offering aggressive loan modification programs and in some cases issuing foreclosure mortatoria. These programs are expected to proactively modify hundreds of thousands of mortgage loans.

You can learn more about Citigroup’s loan modification programs at:

• Citigroup’s statement on Preemptive Initiatives to Help Homeowners
• Citigroup’s dedicated website for the Office of Homeownership Protection

You can learn more about JP Morgan Chase’s loan modification program at:

• JP Morgan Chase’s statement on enhancements to their loan modification initiatives

You can learn more about Bank of America/Countrywide loan modification program at:

• Bank of America’s statement announcing their Nationwide Homeownership Retention Program
• Nationwide Homeownership Retention Program Fact Sheet for Countrywide Mortgages
• Guidance on Bank of America and Countrywide Financial Hardship Assistance Programs