Do I Qualify For A Loan Modification?

You are a good candidate for a Loan Modification if:

  • You want to keep your home
  • You occupy the house as your primary residence.
  • You obtained your mortgage on or before January 1, 2009.
  • Your mortgage payment is more than 31% of your monthly gross (pre-tax) income.
  • You have a hardship and are either delinquent or in danger of falling behind.
  • You have sufficient, documented income to support the modified payment.
  • You have not been convicted of a serious crime relating to mortgage or real estate fraud or theft.

Specific requirements vary from lender to lender.  There is the government sponsored HAMP program as well as numerous “in-house” programs lenders offer to their hardship customers.  Ask your lender what is the best program for you!

Financial Hardship

31% of your gross monthly income is the guiding ratio.  You qualify for financial hardship if you are spending more than 31% of your gross monthly income on your mortgage payment (including homeowner insurance & HOA fee). In this situation you are considered by your lender to be in danger of default. Your lender will try to find a scenario that brings you to a 31% ratio.

Use this formula to calculate what your modified payment will be if you qualify:

gross monthly income  X   31%     = your new mortgage payment

Lenders do not modify payments below 31% of gross monthly income.   They expect the other 69% of your gross income to go towards necessary expenses such as taxes, food, clothing, utilities & reasonable transportation.  They do not take into consideration expenses such as luxury auto payments, student loans, credit card payments etc.  In their eyes your mortgage should come first and you will need to figure out how to eliminate or stop paying other expenses. Homeowners will wait 12+ months for a modification to find out their payment has been reduced by only $100 a month or less.  The lender may also apply any missed payments plus interest and penalties to their principal as part of the modification agreement.  This brings the loan balance even higher upside down than when they began the process.

If your mortgage does not exceed 31% of your gross monthly income you will most likely not qualify for a modification. Instead your reasons for not making your mortgage payment may be due to high monthly expenses such as credit card payments, auto payments, student loans,  etc.  If you are unable or unwilling to eliminate such expenses and you owe more than your home is worth, your best option is a short sale. If you have equity in your home you will want to consider a traditional sale.  Selling your home is a good alternative to foreclosure.  Short sales have provided hundreds of homeowners the relief necessary to gain financial control and start on the road to financial recovery.

If You Qualify For a Modification, Your lender Will Look to Modify Your Loan By:

  1. Reducing your interest rate
  2. Extending the length of your loan up to 40 years
  3. Deferring a portion of the principal  to a balloon payment with zero or minimal interest

Using one or all three modification tools, your lender will try to find a scenario that brings you to that 31% ratio.

If you feel you are a good candidate for a modification you will want to contact your lender and ask for the loss mitigation department. Have your financial information, including a detailed list of expenses, ready to review. You will need to send your lender a hardship letter along with the necessary financial paperwork to back up your phone interview. This includes last 3 months bank statements, previous years tax return, pay-stubs, 4506T form, hardship letter and any other paperwork your lender may request.

If you do not qualify for a modification or feel it is not in your best interest you will want to consider a short sale.  If you have equity in the home and are not upside down on the loan you will want to consider a traditional home sale.

Relocation

If you have had to or will need to relocate more than 30 miles for employment you will most likely not qualify for a modification because the property is no longer considered your primary residence.  Instead you will want to consider a short sale.

Why consider a short sale?
What is a deed-in-lieu?
Foreclosure prevention