How To Complete A Modification - Do it Yourself Tips & Forms
The loan modification process can be a very stressful task. But I’m here to tell you that it’s not impossible. Let’s begin.
Loan Modification Overview & Information:
What is a Loan Modification? – Any change to the original terms of the mortgage agreement between the lender and the borrower?
· Reduction in interest rate
· Change in interest rate from floating to fixed
· Reduction in principal
· Lengthening the amortization period
· Capping monthly payments
· Reducing late fees and penalties
· Postponing monthly payments
· In many cases the homeowner takes on more debt because of the back payments being added to the principal
Step 1: What Documents & Information Do I Need to Submit?
· Lender’s loan modification package. Most lenders have their package online. But many lenders are currently using the RMA Form.
· Current paystubs – Covering 1 month for all borrowers and/or contributing family members living at the property. You can use 100% of the income from a parent or child living with you with a simple “income contribution letter” on their behalf. They MUST live at the property.
· Tax Returns for the last 2 years – All borrowers and/or contributing family members living at the property must include COMPLETE income tax returns; W-2, 1099s, all schedules.
· Current bank statements – Covering 2 months for borrowers ONLY.
· Any other forms of income
o If you are renting a bedroom or part of your home, provide copies of the rental checks being collected or highlight the bank statement where the money is being deposited into your account. If you’re NOT depositing the money, you should start because you need to be able to prove it.
o Social Security – You will need to submit the award letter which states the terms of your income along with proof of receipt (direct deposit on bank statement or copy of the checks being received).
Step 2: How to Qualify? Will I Qualify? How to Calculate My Debt-To-Income Ratio
You must be able to prove that you have had hardship, but still be able to afford the modified payment. If you are unemployed or barely making enough to pay for utilities and food, you will likely NOT qualify. You must have a consistent income and be able to make some sort of a payment. Most lenders are using the 31% Debt-To-Income (DTI) Ratio. This means that you must be making approximately 3 times what your modified payment would be including the property taxes and insurance.
Proposed Payment / Income = DTI Ratio
Step 3: Complete/Prepare a Financial Statement
There is a basic financial statement which allows you to write out all my income, expenses and assets as a draft. Once this is THOROUGHLY completed, you can transfer these figures over to the Lender’s Loan Modification package or RMA.
Another tip: DO NOT LIE TO YOUR LENDER! An honest portrayal of your finances is important because it will expedite your modification negotiations. Inaccurate and undocumented information will slow the process and could very well get your modification denied. If your lender does not have a financial statement for you to complete, you should create your own, documenting net income, expenses, assets and disposable income. The form should be printed and filled out carefully.
Step 4: Prepare a Loan Modification Proposal
In order to do so, go to a website like Zillow or Trulia to find the value of your home and print it out. This may help you in supporting your request for a principal reduction. It should look something like this:
My request to modify under the following terms:
Current Existing Balance: $400,000
Proposed New Principal Balance: $360,000
Principal Balance Reduction: $40,000
Current Interest Rate (interest only): 6.5%
Requested Fixed Interest Rate: 2.0%
Loan Term Remaining: 26 years
Loan Term Requested 30 years
Previous PITI Payment: $2,166
New Payment including taxes & insurance $1,478
Total Income (As per Income and Expense Statement) $_____
Ideally, you want your New/Proposed payment to be 31% of your total income.
Proposed Payment / Total Monthly Income = 31% DTI Ratio
Step 5: Prepare Your Hardship Letter
This is where you plead your case, not your entire life story. You must explain in a few brief sentences what caused your hardship; is it short term, long term, or permanent; and then explain that you cannot handle the current mortgage terms, but you can certainly handle the proposed modified payment.
Again, be ready to substantiate your hardship. If your pay has been reduced, but you do have a steady income flow, explain that. If you have a chronic medical condition that has led to less income, provide the medical records. There must be a true hardship or a foreseeable one such as:
Job Loss, Medical Issues, Divorce/Legal Separation, Increased in Adjustable Rate Mortgage, Decrease in Hours, Job Transfer or new job at a lower pay.
Step 6: Submit Package to Your Lender
You can either fax or mail your package. If you elect to mail it, be sure to do so with a tracked courier to ensure receipt. Either way, include a cover sheet with your name, property address, number of pages being sent, and most importantly, your loan number. Then write the loan number on EVERY page that you will be submitting. Documents that should be submitted and in this order:
· Fax cover sheet
· Hardship letter
· Loan Modification Proposal
· Home Market Value
· RMA or Financial Statement
· Most recent proof income (paystubs or Profit & Loss if self-employed)
· 2 years tax returns, complete with all schedules and W2s & 1099s (if applicable)
· Most recent 2 months bank statements
Step 7: Follow-Up With Your Lender
You should follow-up with 48 hours. Be prepared! Do it first thing in the morning if you can (your wait time will be shorter). If the lender is in a different time zone try calling them as soon as they open. And when you do, have an exact copy of the documents you submitted along with a dedicated note pad and pen. Write the date & time you called, who you spoke with and take notes of the conversation being had.
You will be prompted to identify yourself: loan number, complete name, property address and last 4 digits of your social security. They may also ask you if the house is owner occupied, tenant occupied, or vacant. Lenders are more inclined to work with borrowers that owner occupy the home.
The secret to a successful loan modification is a COMPLETE package! I cannot stress this enough! If you say you’re earning $5,000 per month… be ready to prove it. If you say you are renting out a bedroom… be ready to provide the lease agreement AND bank statements showing a regular monthly deposit of that rent into your account. If you don’t submit all applicable documents up front, the negotiator/specialist/underwriter will be forced to stop the review process and take time out to call you or draft a letter to ask you for these items. Once you’ve submitted the missing documents, your negotiator/specialist/underwriter has moved on to the next file. During all this time, 2 things happen; # 1 – The foreclosure process continues and time is limited. # 2 – The financials you’ve previously submitted may have expired or will soon expire, thereby forcing you to re-submit a new package and thus wasting more time. So be sure to submit a COMPLETE PACKAGE and continue to update it regularly through-out the duration of the process to ensure your success rate.
Step 8: Loan Modification
It’s very common now that lenders offer a 3 month trial period. This 3 month period is typically used for 2 reasons: # 1 to give the lender more time to evaluate your package while delaying the foreclosure process. #2 to ensure you are able to make a monthly payment on time every month.
Once you have completed these 3 payments in full and on time every month, if you qualify, you will be receiving a permanent modification. The loan modification will be sent to you via courier service and will be 3-5 pages outlining the exact terms of your loan; interest rate adjustment, payment amount, impound of taxes & insurance, principal reduction, etc. If you find the terms favorable and agree to them, you will be required to sign and have the documents notarized and returned to the lender within a specified time period with your 1st payment in the form of certified funds.
Loan Modification Rejection
If you’ve been rejected, there are still other options that will cost you money:
· Hire an attorney
· Deed in lieu
Call us today at (408) 836-2457, (408) 608-8713, or Click here to have a Certified Pre-Foreclosure Specialist call you today.