How Difficult Is a Loan Modification?

You may be considering doing a loan modification on your own, and are wondering exactly how difficult it is to conduct a loan modification by yourself.

First, let’s explore exactly what the benefits of a loan modification are:

1. You can stay in your home, by reducing your monthly payments

2. You can possibly have a reduction in principal through payment forgivenance from payments you may have missed

3. You can restructure your loan. Changing your loan from an ARM to a fixed-rate

4. You can preserve your equity in your home by avoiding default and foreclosure

Loan Modification Difficulty?

So how difficult is a loan modification?

Negotiating with your mortgage company can be difficult and time consuming. That is why many people choose to hire a company to do it for them.

That being said you can do it yourself. What you will need is the follwing:

1. Gather all of your documents

* Mortgage Statement (most recent for 1st and 2nd)
* Property Tax Statement (most recent)
* Homeowners Insurance Statement (most recent)
* Flood/Wind/Earthquake Insurance Statement (most recent)
* Car Loan Statement (most recent)
* Car Insurance Statement (most recent)
* Other Loan Statements (most recent)
* Credit Card Statements (most recent)
* Utility Bills (most recent water/sewage, gas/oil, telephone)
* Cell Phone Statement (most recent)
* Medical/Dental/Life Insurance Statement (most recent)
* Medical Expense Statement (most recent not covered by insurance)
* School Tuition and/or Child Care Statement (most recent)
* Bank Statements (for the last 4 periods)
* Tax Returns (for the last 2 years)
* W2’s (for the last 2 years)
* Pay Stubs (for the last 4 pay periods)
* Hardship Documents supporting your hardship (birth certificate, death certificate, medical bills, divorce papers, bankruptcy papers, etc.)

2. Create a Financial Statement & Hardship Letter

We already included an introduction to loan modification hardship letters in an earlier post, but it is essentially a statement telling your bank why you can’t pay your mortgage.

(Sample Financial Statement, Sample Hardship outline) The financial statement is the most important document the lender will look at. We want to make sure it is filled out completely and as accurately as possible. The lender will derive from your financials your Current DTI Ratio and a Proposed DTI Ratio. You should also calculate those ratios:

* Current DTI Ratio = (Mortgage Payment + Taxes + Homeowners Insurance) ÷ Gross Income If the Current DTI Ratio is above 45% than your likelihood of completing a loan modification is good. On the other hand, if you have no income or very little income, than your Current DTI Ratio might be extremely high and it would make sense for the bank to pursue other options like foreclosure.
* Proposed DTI Ratio = (Mortgage Payment + Taxes + Homeowners Insurance) ÷ Gross Income The guidelines for the proposed DTI ratio differ according to each bank but your proposed ratio should be between 31% and 45%. IndyMac Bank is looking to modify homeowners to a 38% ratio. Bank of America is looking to modify homeowners to a ratio of 34%.

If your rate is about to adjust, calculate your future DTI ratio. Again, if the ratio is above 45% than your likelihood of completing a loan modification is good. Some lender’s may require you to be late while others may perform the loan modification before you become late. The DTI ratios are a good rule of thumb when formulating your loan modification case but there are other points to also consider:

The bank is going to look at your specific expenses. If you are looking for a reduction in your loan but have a lot of “luxurious” expenses, than the bank will take that into consideration. The bank may want the “luxurious” expenses applied towards the loan payments. So, make sure you have eliminated all those unnecessary expenses in your life.

They will look at your total expenses vs. your total income. If your total income is greater than your total expenses than they might ask you to take the difference and apply it towards your loan payment.

With all things considered, always remember, the loss mitigation department will try to minimize their losses. They will find every excuse to make sure you make the highest payment possible without you defaulting on the mortgage payment again.

The Hardship Letter is a document that must be created in your own words. Basically you want to get across to the bank that you did experience a hardship but are looking to resolve the situation with their help. I would also include if you saved any money that you are willing to put that towards a good faith deposit. Also include the new mortgage payment you can afford.

3. Prepare yourself, this is a daunting process

The bank is looking to get all of the money they can out of you, so do your best to prepare mentally and financially for this process. A loan modification can take anywhere from 4-8 weeks for professionals, so consider your process may take upwards of 12 weeks (3 months) to complete.

4. Call your bank’s loss mitigation department

This is the department at your bank responsible if your home goes under foreclosure. They are going to be your main point of contact throughout the process.

They will explain the documentation (from above) that they need, so be prepared to fax multiple copies to them and for yourself.

In a couple of days, call them back up and confirm they have the paperwork.

5. Document all communication

If you talk on the phone with the bank, write it down. Include the name of the person you spoke with, what you discussed, etc.

All of this may be needed if the bank denies your loan modification application.

6. Closing the deal

The bank may ask for a deposit upfront, so be prepared to have to shell out more cash to close the loan modification process.

This process may take upwards of 12 weeks, especially if you are financially naive, so be prepared and good luck!