We have heard it over and over; "change is not going to happen overnight, it takes time". Logically this is a very accurate statement. However, for the millions of Americans who are hanging on by their fingernails and need immediate change this is not an encouraging statement. There is hope however.
I have written before about HOPE for Homeowners; a program created by Congress to assist homeowners at risk of foreclosure. This program may not be for everyone, however. One of the drawbacks of this program is that you split your equity with the federal government when you sell. For example, if you sell your home within 5 years the government will receive 90% of the equity on your home. In year 5 the government receives 60% of the equity and any time after 5 years the equity is split 50/50%. When I see this I think of those who plan to stay in their homes for many years to come and may ultimately have a great deal of equity when the time comes to sell. Good news, there is another option.
Today I am going to discuss "loan modification". This is an agreement made between you and your lender modifying the terms of your existing mortgage. With the new generation of financing we have seen variable rates, low money down and negatively amortized loans (your principal grows as you are paying less than the interest on the loan). While these loans worked well to initially get a person into a home they are dangerous in the long run. Loan modification is simply that: modifying the existing terms on your loan.
The loan modification process is not easy and many may need the help of an attorney to navigate these complicated waters, however, here are the basics:
•1. You must be able to show your lender that it is in their best interest to grant you the modification. Simply stating that you want a lower interest rate is not going to cut it (this is called a refinance). The lender will need evidence of your financial struggle to pay your current mortgage at is present terms. Keep in mind, if your present situation is so dire that you cannot afford new "reasonable" terms they will not consider a modification.
•2. Do your research and have a plan. Remember that the Loss Mitigation department of your loan servicer is well trained to reduce losses to the company and are going to get as much out of you as possible. Be prepared with your income and expenses. Collect your W-2's, gather your past 3 years of taxes and at least 6 months of bank statements to support your income. Pull together your bills to show your expenses. It is also important to document why you have fallen behind (receipts for unexpected expenses, letter from employer showing hour cutbacks, etc.).
•3. Know who to talk to. There are two departments who you will likely come into contact with, they are Collections and Loss Mitigation. It is important to know this so that you do not waste too much time talking to the wrong department.
•4. Be prepared. Oh, did I already say that in #2? This is the most important aspect of the process. If the evidence that you show the lender indicates that you cannot afford the home with new "reasonable" terms then they will not spend the time to modify your loan and simply allow it to go into foreclosure. However, if the information that you provide shows that you have an excess of income they will feel that you should be able to make your payments and not modify the loan. It is crucial that your numbers fall in line with what your goals are of the modification.
•5. Paperwork, paperwork, paperwork... The remainder of the process is paperwork similar to what you would complete in order to obtain the loan, however, in reverse. Now you are proving that you are financially incapable of making the payments.
There you have it, another option to help you hang on a little longer in these rough economic times. This is certainly a simplified version of a very complicated process that could last 60-90 days. In fact, for many it may be worthwhile to hire an attorney to assist you through the process but it is possible to do it on your own!
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