A mortgage modification is a permanent alteration to the terms of your existing mortgage. If your lender agrees to modify your mortgage then you keep the same loan that you used to purchase your property but the terms of that loan are modified. Because you are keeping the same loan and not applying for a new one, as you would with a re-finance, your credit score is not relevant.
The reasons for modifying a mortgage are much the same for both the lender and the borrower. Both parties do not want the property to go in to foreclosure. Foreclosure will likely cause the lender to lose money and it will cause the borrower to lose the property and damage the borrower’s credit.
An important point to remember is that a lender will only modify the terms of your mortgage if they believe that it is in their best interest to do so. Mortgages are not modified out of mercy, goodwill or pity. You need to present a sound business proposition to your lender that makes financial sense.
In order for your lender to consider modifying your mortgage you must convince them that the alternative (denying you a modification) will most likely result in the ultimate foreclosure of the property. The lender will not modify your loan if they believe that you are likely to continue to make payments for the foreseeable future under the current terms of the loan.
Any or all of the terms of your mortgage can be modified. Here is a list of some possibilities:
- Lower fixed interest rate for the remainder of the mortgage
- Lower or even a 0% interest rate until a set date. Interest only periods can be as long as 10 years with some lenders like Chase, WaMu and EMC.
- A payment holiday until a set date
- Arrears added to the balance so as to bring your account up to date and help your credit
- Fees and charges forgiven
- Lowering of monthly payments by lengthening the term of the loan up to 40 years
- A reduction in the principal owed
The act of applying for a mortgage modification does not affect your credit score in any way. Unlike a bankruptcy or foreclosure, a mortgage modification will not appear on your credit at all. Making late payments on your mortgage does damage your credit. It is very common for a successful modification to remove any arrears from your account and add them to the amount outstanding on the mortgage. This brings your payments up to date and has a positive effect on your credit score.
Overview of the Mortgage Modification Process
The mortgage modification process typically takes anywhere from one to three months. However, these times scales can be shorter as most lenders are rapidly putting procedures and personnel in place to streamline the process. In a simplified form, the process can be summarized as follows:
• Complete the TurboModification pack
• Contact your lender’s loss mitigation department
• State your interest in applying for a modification. Request their mortgage modification pack (if they have one, use our generic pack if they don’t).
• Complete the pack and mail/fax it to them.
• Confirm that the lender/servicer has received the pack
• Possibly have further conversations with the representative assigned to your case
• Accept or Reject the modification offer
• Possibly negotiate the offer further.
Companies are starting to streamline the whole modification process. It is possible that you can get a modification offer during your first call with your lender. Such an offer would typically be subject to verification of your financial statement.
Some companies like IndyMac and CitiMortgage now have an online mortgage modification form.
Collate Required Documents and Information
The first step towards modifying your mortgage is to gather all of the relevant information. Use a bound paper pad that is only used for your mortgage modification notes. On the front page write your name, address and mortgage account number. You may be asked for this information numerous times. This pad will act as your written record of all contact with your lender. Test two pens and keep them with your pad.
Gather and collate all documentation that relates to your mortgage and keep this to hand. Any statements that you made during the original mortgage application may be brought up for discussion. For example, if you stated that you earn $190k per year in tips and this is no longer the case then you may need to explain such on the phone. Or maybe you stated that you had $50,000 in cash but that is no longer the case. You may be asked what happened to the cash.
In a future step you will need to create an income and expense statement. In order to do this you will need your last three months bank statements and make notes of all of the non-bank account and annual payments that you might make.
You will need any documentation that relates to your income or changes in income since you applied for the original mortgage. This could be anything from a notice of redundancy to a divorce decree. Also collate the following:
• Current pay stubs (at least your most recent)
• W-2’s or 1099 for the last 2 years.
• 1040 for past 2 years
• Bank Statements for current and savings accounts for last two months
You need to know how much your house is worth and be able to back that figure up with some sort of proof. You can tell a realtor that you are considering selling your home and they will give you a written valuation. If you do this then you should tell the realtor that you are absolutely desperate and need to sell the house as fast as possible. Inform the realtor that there will be absolutely nothing left in the house that does not have to be there, e.g light fitting, stove, refrigerator etc. You are basically trying to get as low of a valuation as possible.
There is also a website called www.zillow.com. This site will give you a valuation but it may well be higher than the actual value of the house.
You can also use the services of an appraiser. Your lender will take an appraiser valuation very seriously.
Calculate Debt to Income Ratio
When preparing your financial information you should think about what the lender will use the information for. Lenders take a close look at your debt to income ratio (DTI ratio). This is the ratio between how much you spend each month servicing personal debt and how much you earn. It is a calculation of the percentage of debt you are carrying in relation to how much money you are making. This gives the lender an indication of how much additional debt you can take on.
A DTI ratio calculator is included in the pack that you have purchased. Using the calculator, add up your fixed monthly debt expenses such as your car payments, minimum credit card payments and any other regular debt obligations, such as monthly child support or student loans (you don't have to include bills for things such as groceries or utilities). Add your expected housing payments (your mortgage payments plus, for example, private mortgage insurance, homeowners insurance and property taxes). The calculator will divide the total by your gross monthly income.
Lenders typically say a DTI ratio should be no higher than 38 percent. Some lenders do accept DTI ratio’s as high as 50% for customers that demonstrate their ability to pay.
If you do not wish to use the calculator then the formula for calculating your debt to income ratio is as follows:
(Total Monthly Debt Expenses / Total Gross Monthly income) * 100
For example, if all of your credit card payments, loans and mortgage payment amounted to $2000 per month and your total gross income (not your take home pay but the amount you get paid before you pay tax) is $5000 then the formula would look like this:
(2000/5000)*100 = 40
Your debt to income ratio would be 40%.
The first thing that the lender will do with your statement of income and expenses is calculate your DTI with your current mortgage terms. If your current DTI is too close to the lender’s guidelines then they may well not offer you a modification on the grounds that you are not in financial distress and are probably just trying to spend less money on interest. If your current DTI is above their guide range then they will try to bring your DTI ratio within their guide range by reducing the monthly cost of your mortgage.
There is a lot more information and tools available on this step in our eBook at turbomodification
Make your income and expense statement
The most important point of your income and expense statement is to prove to your lender that you cannot afford the mortgage as it is but you will be able to afford the mortgage if it is modified. If the lender sees that you can afford the current mortgage or that you can actually afford to pay the adjusted rate that is scheduled then the lender is unlikely to modify the mortgage. The lender will not see the point in modifying the mortgage to terms that you can’t afford either.
It is also very important that you do not lie to your lender. If you do then you can be charged with fraud and may actually go to prison. Figures can be shown with particular slant that favors your situation. For example, you can value jewelry at retail price or at auction price. If you feel that you absolutely must lie to your lender or you are afraid that you may incriminate yourself for a previous fraudulent mortgage application then you really should consider consulting an attorney. Mortgage fraud is a very serious business that can land you in federal prison.
It's important to be honest about your finances because inaccurate information that can't be documented will delay the process and could preclude a loan modification that otherwise would have been offered to you, or raise false hopes that won't pan out.
At this point you should complete the document titled ‘Financial_Statement.PDF’. This will document your net income, expenses, assets and disposable income. The PDF should be printed and may eventually be sent to your lender if they don’t have an online form or a modification pack of their own.
There is a comprehensive income and expense calculator delivered with our DIY pack
Mortgage Modification Proposal
At this point these are the figures that you know:
• The value of your property
• How much you owe on the mortgage(s)
• Your DTI Ratio
• What mortgage payment(s) would bring your DTI ratio closest to 38%
• Your disposable income before the proposed modification
• Your disposable income after the proposed modification
These are all of the figures required to complete a mortgage modification proposal. The next page is a loan modification proposal example. The sample asks for everything and is rather aggressive. You may not need to ask for a principal reduction of forbearance of payment (payment holiday). Remember to be reasonable for your situation. If the representative thinks that you are being totally unreasonable in what you are asking for then it may not work in your favor.
For detailed examples and instructions regarding your mortgage modification proposal see our website
Hardship Letter
One of the most important documents that you will create is your hardship letter. If you get this wrong you may well be refused a mortgage modification. The purpose of this letter is to make your lender believe that if the terms of your current mortgage are not modified then the loan is most likely going to go into default and therefore foreclosure. It is also just as important to make your lender believe that you can afford a lower payment. Your lender will not see the sense in modifying your loan from something that you can’t afford into something else that you can’t afford either.
Everything that you state in your hardship letter should be verifiable. If you state that a medical condition prevents you from working then you must have proof. If you state that you cannot afford the adjusted rate of your mortgage then you must state why. For example, you might state that when you took out the mortgage that you were told by the broker not to worry about the adjusted payment because you could simply refinance or sell the property before the adjustment came in to effect but now the market has changed and this is no longer possible. This is a common scenario.
The following are some possible reasons for hardship:
• Loss of employment
• Lesser employment (new job or position pays less)
• Marital difficulties
• Employment Transfer
• Inability to rent/sell
• Payment Adjustment
• Military Service
• Illness
There are some things that must be on your hardship letter. These are:
• The lender’s name and address
• Your loan/account number
• Your name
• The address of the property that the loan is secured against
• Why you purchased or refinanced the property
• Briefly state the history of the loan, commencement date, payment history, (only if the history is good).
• State why the loan has fallen or will fall into arrears
• State that you have tried to refinance but you can’t. This is normally because lending criteria has changed and/or the house is now worth less than the amount owed on the mortgage.
• State how you plan to or have fixed the problem(s). This could be, “After 3 months of unemployment, I have a new job but it does not pay as much as my previous job. I can afford a lower regular payment but I also need help with the arrears so that I can get on top of the mortgage”.
For the rest of this chapter and detailed examples see our website
Covering Letter
When you send your bundle to the lender there will be a fax cover sheet first, this is supplied as a separate document called ‘Fax_Cover_Sheet.PDF’. Below that will be a covering letter and it will look like this:
Your Name
Property Address
Lender
Loan Number(s)
To whom it may concern, (find out who to send it to – if not a name then a department is acceptable)
Attached you will find my proposal and supporting documentation for a mortgage modification of loan number #################. After an analysis of my financial situation I am proposing that the following is in both our best financial interests. I am unable to afford the current terms of my mortgage(s) and will be forced to foreclose if the terms are not altered. I have taken the time and effort to produce this proposal because I do not want to go in to foreclosure.
Documents Included and in this order:
• Mortgage Modification Proposal
• Financial Statement
• Property Value Assessment
• Most Recent Paystubs (contract of employment if just started)
• Last Year’s W2’s/1040/1099
• Recent Bank Statements
• Hardship Letter
Your Name Here
Signature as it appears on loan document
Prepare for First Contact with Lender
If you are using an attorney then you can forgo the remainder of this document. Just send your completed pack to your attorney and they will take it from here on. If you would like us to recommend a law firm that is a member of our discount program then email your request with the name of your city and State to support@turbomodification.com.
By this point you should have completed the DTI ratio calculator, the financial statement and your hardship letter. You should now know the following:
• Current DTI Ratio
• What mortgage payment would bring your DTI Ratio to 38% or at least to 50% or better (0% is best, 100% is worst)
• What your current disposable income is
• What your disposable income will be after the proposed modification
• Your hardship letter should be complete
This fist thing to do is to gather your information before you pick up the phone. These are the items that need to be in front of you before you make the call.
• Your notepad with two tested pens
• A print-out of your fax cover sheet
• A print-out of your covering letter
• A print-out of your proposal
• A print-out of your signed hardship letter
• A print-out of your signed financial statement
• The phone number from your last mortgage statement
Bear in mind that you might be on the phone for hours without the ability to leave where you are sat. If you have a portable phone then make sure that it is fully charged and there is an alternative available if possible.
Some companies have streamlined the mortgage modification process. A visit to their website may give you the direct number to call.
The best thing to do is to call the number on your last mortgage statement and explain that you wish to speak to somebody about the possibility of a mortgage modification or a mortgage loan workout.
Here are some tips before you make the first call:
• Be patient
• Don’t lose your temper
• Be prepared to be put on hold and transferred a lot
• Write down everything that happens – times, names, numbers
• Be polite, this is very important
• Remember that the people you speak to do not care about your modification as much as you do
• Do not lie
For more information see our website
First Contact with Your Lender
When you eventually speak to a person whose job it is to deal with mortgage modifications you should tell them that you need a mortgage modification and that you have your hardship letter, proposal and financial statement ready. If you have a fax machine then you may be asked to send the documents right away. It is possible and increasingly common for people who are prepared, to be offered a modification on their first call. This is usually subject to verification of your financial statement.
It is most likely that your lender will have a modification pack of its own or even an online application. You will be asked for the same information that you have put together so it will be a simple task. The lender may accept the letter and financial statement that you have already prepared.
At this point you are armed with all of the knowledge that you require to be able to discuss the modification of your mortgage. Tell the representative that you know your debt to income ratio and what it would take to bring it down to 38%.
The representative may ask you what you believe the house is now worth. Be pessimistic here and give as low a figure as you can. The lender is assessing the financial risks of you foreclosing on the loan.
Ask the representative about their procedure, what the next step is and what should you do next. Write down the answer in your pad.
If you are offered a modification then and there on the phone, ask the representative when you will receive the offer in writing. If you have a fax then they may fax it to you immediately. If you are told that a pack is being mailed to you, ask the representative when you can expect it to arrive.
You have completed your first call and it may be your last.
The Mortgage Modification Package
If your lender has a pack that they insist on you using then you should do just that. It is becoming increasingly common for lenders to have their own packs as mortgage modifications become more and more common.
Do not lie when completing the pack, this may preclude you from being offered a modification that you would have otherwise been offered.
Do not delay in completing and returning the pack. You may be given the option of faxing the pack back in which case you will be sent a cover sheet. If you do fax back the pack then make sure that you phone the lender the moment that you have sent the fax so that you can make sure that the pack was received and it is complete. Before you end this call, make sure that you ask as to when you should receive a response by and make a note of the answer.
If you do not receive a response by the date that you were told then call the lender again and again until you do.
Learn how to Negotiate with your Lender
There are several tactics that you can use when negotiating with your lender. The approach you take depends upon your intentions for the property, level of desperation and your personality.
Softly, Softly, Stress Free Approach
This is where you go along with whatever your lender wishes and appear to be happy with whatever they suggest. This will give you the best chance of getting a modification as soon as possible and you can start saving money and living with less stress sooner rather than later. This is the most common route.
The Bait and Switch
This is where you go along with whatever your lender wishes and appear to be happy with whatever they suggest. This will give you the best chance of getting a modification as soon as possible and you can start saving money and living with less stress sooner rather than later. Sound familiar? This is the ‘bait’ portion.
Once you have a modification in place you will probably have the ‘standard’ longer loan period, lower fixed interest rate, arrears tacked on to the end of the loan and any late fees forgiven. This is acceptable to most people and they will carry on with the rest of their lives. However, if you really want to try and push your lender to the limit you can try for more.
Now that you have a reasonable loan that cannot be taken away from you unless you default you can safely ‘push your luck’ to see what else you can get. Start the whole process over and try to modify the loan that you have just modified. This time asked for much more.
This is where we get onto the subject of principle reduction.....
To learn more and see other approaches go to our website.
Negotiate with your Lender
Whatever you do, do not be rude to the person you are talking to. This will never help you and will probably lead to a less favorable outcome.
Negotiating with the lender will almost certainly delay your modification and can even scupper it. Lenders have guidelines and it is from those that you will be offered what you are offered. You can expect to pay as much as you can afford in a way that will eventually pay off the mortgage.
Remember, the only tool that you have is to go into foreclosure and they do not want that. In most cases it will be better to accept what you are offered and try to get more later. That strategy costs you nothing, trying to get too much may cost you your home.
Do not try and get a cash-out re-finance. That is just not on the table.
Consider the Modification Offer - Accept or Decline
If all has gone well you are now looking at a written mortgage modification offer from your lender. If you feel that it is insufficient then you can tell the lender such and inform them that you may no longer be able to make payments unless the offer improves. They will probably make you a better offer. If they don’t then you can accept the offer anyway unless they withdraw it. If you like what you see then, by all means, accept it. Read all of the paperwork carefully. Question anything that you don’t fully understand. Sign the offer and return it as soon as possible. Call your lender to make sure that they have received your signed copy and that everything is in order.
If you are turned down for a modification then it is important that you ask why. If you now chose to use the services of a legal professional then the reason for denial is the first thing that they will ask you for.
