- Peter King - MortgageLoan.com
Monday, Jan 4, 2010
Mortgage loan modifications have been big news lately. Unfortunately, that’s largely because of all the difficulties homeowners are having getting one. What can you do to improve your odds of being approved?
Actually, there’s a lot you can do. Although some things are outside of your control – like if you lost your job and have no income – there are a number of things you need to pay careful attention to if you want to be approved for a loan modification. Most are fairly straightforward, but they all fall under the heading of simply paying attention to details.
A loan modification offers a way to reduce your monthly mortgage payments if you’ve suffered a financial setback or otherwise are having trouble making your payments. Although the government’s Making Home Affordable loan modification program gets most of the attention, most lenders also offer in-house loan modification programs as well, although the terms you get may not be as generous as in the government program.
On a Making Home Affordable loan modification, you have to be approved twice. First, when applying for a “trial modification,” a three-month period designed to see if you can manage the new payment schedule, and second for a “permanent modification” after successfully completing the trial period. But the following guidelines apply in either case, and to private “in-house” loan modifications as well.
Pay attention to details
First, you have to make sure you understand everything your mortgage servicer wants from you and fill out all the forms properly. Read all the instructions, collect and submit all the documents they request. If something isn’t clear or you just don’t understand it, contact your mortgage company and ask. Improperly completed forms and missing documentation are two of the major reasons lenders cite for loan modifications being denied.
Be accurate. One common mistake people make is either misstating their income or being too optimistic in predicting earnings. The lender will investigate you thoroughly before giving final approval – and if you haven’t been up front about your income, they’ll be sure to find out. Ironically, you can get in trouble for both understating your income (to make your need for a loan modification seem greater) and overstating it (to make it appear you’ll be able to keep up with payments). You may be able to reapply or modify your application if your reported and actual income don’t match up, but many mortgage servicers will simply deny your application.
Calculate a new monthly budget and cut unnecessary expenses to the bone. Lenders will be less likely to approve your application if they think you’re not serious about eliminating nonessential spending. At the same time, don’t go overboard and exaggerate how much you can realistically cut costs – this can lead your lender to assume you’ve got more disposable income than you really have available.
The hardship letter can make a difference
Put a lot of thought and effort into drafting your hardship letter. This is where you explain why you need a loan modification and why you think it will make the difference between being able to keep your home and losing it to foreclosure. In particular, it helps if you can show you’re committed to staying in the home. Those who can show some sort of emotional connection to the home – it’s in your hometown, your children were raised there, you purchased it with an inheritance from your parents – will often be viewed more favorably by lenders, since they have a strong motivation to keep up with their new payments in order to keep the property.
If you’re approved for a trial modification under the government’s Making Home Affordable Program, don’t assume you’ll automatically be approved for a permanent modification if you keep up the payments. You’ll still have more forms to complete and other documentation to submit. About half of all homeowners completing trial modifications so far have been denied permanent status – typically because their reported income didn’t match up or other problems with their documentation.
Keep your credit rating up
Check into your credit rating – it will be a factor in whether you get approved or not. Order copies of your credit report from all three major credit agencies, Experian, Equifax and TransUnion – you’re entitled to one free copy a year from each – and review them for errors or omissions that might be hurting your credit.
Also, do what you can to improve your credit rating or, at least prevent it from declining. Pay down major credit card debt, if possible; otherwise, avoid piling up debt if finances are tight. Pay all bills on time, including utility payments but particularly installment debt like your auto loans and credit cards. If you’re in a pinch, be aware that creditors generally won’t report you as late unless you miss a payment by a least 30 days – but try not to get in the habit of “juggling” delayed payments.
Preserve all correspondence
Keep copies of all your correspondence with your lender. This is one good reason to communicate by letter or email, instead of by phone, because you’ll have a record of everything that was said or promised, in case there’s a dispute later on. And make sure you’re dealing with the right department at your bank – loan modifications are handled by loss mitigation, not your regular loan servicing department or collections.
Finally, be patient and persistent. Follow up if you don’t get a timely reply to your application or inquiries, and keep following up once a week until you get an answer. Many lenders are overwhelmed with applications for loan modifications right now and customers can remain in limbo for months, including those who’ve already completed trial modifications and are waiting to hear if they’ve been approved for permanent status. It’s definitely a case of the squeaky wheel getting the grease.