Mortgage Loan Modifications as a Legal Option to Prevent Foreclosure
Negotiating a modification to the loan on your mortgage might help you avoid a foreclosure if you are having trouble keeping up with your monthly payments. A mortgage loan modification is one of the most common types of loss mitigation, the term for techniques to prevent a foreclosure. The modification changes the original terms of the promissory note to reduce the amount of the monthly payments, usually while lengthening the term of the mortgage to compensate. A modification may also lower the interest rate and integrate missed payments into the remaining balance.
Some loan modifications are proprietary, which means that the lender offers them independently. Others are based on external programs for which some homeowners are eligible, such as the Flex Modification program for people with loans owned by Fannie Mae or Freddie Mac.
Completing a Loan Modification Application
The loss mitigation department at your mortgage servicer can help you get started with completing a loan modification application. You can find its contact information online or on the statement for your monthly payments. The application will include your identifying information in addition to a description of the mortgage and your property. You also may need to submit bank statements, pay stubs, tax returns, and information about your income and expenses. To prove that you are eligible for a modification, you need to show that you are facing a financial hardship but will be able to keep up with reduced payments. This may involve providing a statement or affidavit about the hardship.
A homeowner can contact a housing counselor approved by HUD for help with the loan modification process.
If you are confused or uncertain about the process, you can contact a housing counselor approved by the Department of Housing and Urban Development, or you can talk to an attorney. You should not ask a loan modification company to assist you. These entities are often scams that exploit homeowners by charging fees for things that homeowners could accomplish on their own. Beware of claims that a company is skilled in “negotiating” a loan modification, since negotiations rarely play a key role in the process. Also, adding another entity as an intermediary between the homeowner and the mortgage servicer can result in delays and miscommunications. This can even lead to the denial of a modification in some cases.
Rules for Loan Modifications
During the mortgage crisis in the early 2010s, mortgage servicers committed many errors and engaged in outright abuse involving loan modifications. This resulted in foreclosures that could have been prevented. In response to this issue, the federal government implemented mortgage servicing regulations that provide additional protections to homeowners. Certain states, such as California, Colorado, Nevada, and Minnesota, passed parallel laws to complement the federal laws. These rules give mortgage servicers more incentives to work out alternatives to foreclosure with homeowners. They also have adjusted the process of loan modification to reduce the risk of errors.
An important consequence of the new rules is that a homeowner now can work with a single representative of the mortgage servicer throughout the process. This concept is known as continuity of contact. It does not apply to every loan or every servicer, but it covers most situations. Continuity of contact makes the process more streamlined and helps make sure that important information is not overlooked.