Loan Modification….The Best Foreclosure Option For Most Homeowners
One of the best Foreclosure Options for many homeowners is a Loan Modification that reduces your monthly payments and lowers your home loan to something closer to the actual value of your property. Reduced payments can be from principal reductions, lowered interest rates, extending the number of years or a combination of any of these tools. However, reducing the principal amount of your mortgage is clearly the most effective long term strategy to stop foreclosure and avoid the Foreclosure Process entirely.
In addition to being a popular and effective foreclosure option, the recent Nationwide Foreclosure Settlement provides much needed incentive and some limited funding to force banks to agree to more loan modifications. Unfortunately, the amount of money involved compared to the size and scope of the underwater mortgage crisis means that just a small percentage of homeowners will actually benefit from the Settlement. Outside of the Foreclosure Settlement, very few large lenders have effective loan modification plans in place and little motivation to change.
Despite being the obvious solution to help end the foreclosure crisis, banks hate giving away money which is how many lenders wrongly perceive loan modifications. Instead of trying to improve the economy by slowing the foreclosure rate — which will help both homeowners and banks — most lenders focus solely on short term profits and overall have been very reluctant to work with homeowners to create fair and equitable loans rather than the upside down version most borrowers have. Foreclosure is Not Your Fault – Blame the Banks Again!
Further, banks also fear that if foreclosure loan modifications become too popular, even homeowners who can otherwise afford mortgage payments will stop paying in the hope of getting a better deal through Strategic Default. Imagine the horror of giving a homeowner a fair deal!
A final reason why so few loan modifications are granted involves the role of “loan servicing” companies in the approval process. Hired by lenders to handle billing and collection matters for your mortgage, loan servicing companies make much more money if your home goes into foreclosure or your loan goes into default. Although there are exceptions, many of these companies have no interest whatsoever in helping you out of the foreclosure process. Who Owns Your Mortgage?
Getting Your Loan Modification Approved
The best way to get your loan modification approved is to submit a professional looking package of materials to support your request and convince the lender you need help. However, make sure you’re actually sending the materials to the right party which is the company that owns your loan, not the loan servicing company who has little or no interest in helping you.
After confirming who actually owns your loan, the next step is documenting to the lender that your mortgage is underwater. By demonstrating that your loan is more than the value of your home and by how much, you’ll force the bank to decide between helping you or paying for a costly and protracted foreclosure battle. Be sure to review our section on Underwater Mortgages for the best way to determine the value of your home and figure out if you actually have an underwater mortgage. Defending Foreclosure Lawsuits
Although the process varies slightly among banks, most require a Financial Hardship letter or affidavit to explain what caused your money problems and a summary of your overall financial condition. To help you with this important phase of the approval process, we’ve prepared a Loan Modification Financial Hardship and Cover Letter to send to your lender which briefly explains what you’re asking for and why as well as providing an outline of the typical information included in your Financial Hardship Letter. See More Sample Documents
Like Goldilocks and the Three Bears banks want to confirm that you don’t have too much money to justify a loan modification, but have enough money to make future payments which is why that want details on your finances. Be accurate and provide enough details for them to know what’s going on and be careful not to misrepresent something which might have actually helped if you’d been honest.
Watch Out For “Dual Tracking”
While the owner or loan servicing company (if you can’t find the owner) is working on your loan modification application, and even if they promise you that your foreclosure lawsuit is on hold, don’t be fooled.
Through a method called “dual tracking” most lenders continue to pursue foreclosure cases even while the loan process is ongoing so make sure you meet all court deadlines and continue to defend your foreclosure lawsuit until you get formal approval and confirmation in writing that the foreclosure is over. If you make the mistake of being lulled into a false sense of security, you’ll be pondering what happened from the sidewalk outside your former house! Avoiding Deficiency Judgments
Don’t Forget About Mortgage Insurance
Although you may not have been thrilled at your loan closing when you were forced to buy mortgage insurance, the mortgage insurer can be your best friend.
The purpose of mortgage insurance is to protect the lender from potential default on payments, which if it happens requires the insurer to reimburse your bank for its loss. To avoid this result, mortgage insurers are often willing to contribute money towards a loan modification or other foreclosure solution to avoid taking a full hit on your mortgage. More on How Mortgage Insurance Can Help Stop Foreclosure.
Make sure to keep your mortgage insurer involved at the earliest stages of your foreclosure problems as they can be a very powerful ally at a time when everything else seems stacked against you.