A loan modification, in which your mortgage lender reduces the amount of your monthly home loan payment, can provide you with much-needed financial relief if you're struggling to pay your home loan each month. But a mortgage modification is a complicated process. If you don't fully understand how it works, you could run into serious problems. Learning the rules, then, is key to negotiating a successful modification.
Know the Requirements
There are two ways in which you can earn a mortgage modification, and both require separate strategies. The government runs its own modification program, the Home Affordable Modification Program, in which it provides financial incentives to lenders who modify the mortgage loans of struggling homeowners. To qualify for this program, you'll need to have taken out your mortgage loan on or before Jan. 1, 2009, and owe $729,750 or less on your home loan. You also must have a mortgage payment that is 31 percent or more of your gross monthly income. You can also apply for a mortgage modification without going through the government program. In both cases, your existing mortgage servicer will handle your application. But only in the government program must you meet certain qualification guidelines. If you don't know this, you could waste valuable time in applying for the wrong type of modification. This could get you dangerously closer to defaulting on your mortgage payments, causing serious damage to your credit score.
Calling the Right Company
To start any type of modification process, you must first call your existing mortgage lender. This is another key fact for you to know: The federal government, even though it offers the Home Affordable Modification Program, does not modify any mortgage loans on its own. Lenders do this work. You also can't shop around with different lenders to modify your home loan. You can do this if you're seeking a refinance, but not a modification. Again, by not knowing this key information, you can delay the start of your loan modification, and that might increase the odds that you fall behind on your mortgage payments.
Following the Rules
Once you start the modification process, you'll have to send in a number of documents that prove that either your monthly debt obligations have risen or your gross monthly income has fallen. These documents can include copies of your work paycheck stubs for a month, bank savings and checking account statements, most recent credit card bills and last income tax return. You will also have to write a financial hardship letter that clearly explains the reasons why you can no longer afford to make your mortgage payments. If you don't provide this information in a timely manner, or if you provide the wrong information, you could scuttle your modification chances.
Settling for a Payment That's Still Too High
When modifying your mortgage loan, your servicer can take several steps to lower your payment. Your lender can reduce your interest rate, rework the terms of your loan or forgive a portion of your principal balance, each of which can leave you with lower payments. But make sure when you accept an offer that you can afford the new payment. It does you no good to lower your monthly payment only to find out that you still don't have enough money to cover it each month. Before you start the modification process, make sure that you know exactly how much you can afford to pay each month in mortgage payments. If you don't take this step, you might still end up defaulting on your monthly payments.