Mortgage Modifications

When it comes to making your mortgage more affordable, you may want to consider asking the lender for a loan mod or mortgage modification. Good news is they seem to be happening much more now than 2 years ago. And it looks like the servicers have solved their losing-documents problems.

Loan mods can be done before, during or after a bankruptcy. Usually all that is required is the bankruptcy attorney’s OK for the lender and the debtor to talk directly with each other. If you are in an active Chapter 13 bankruptcy, the lender may request approval from the court to do the modification.

First step is to tell the mortgage company you want to get a loan modification. Many lenders have been proactive sending out letters to borrowers informing them of the opportunity to modify the mortgages. If not, call the customer service department of your lender and tell them you want a loan mod.

The lender will usually send you back a loan modification packet which will request various documents including pay statements and an authorization to see your federal tax returns. They will also send you an application form which, among other things, may ask for you to prepare a rough budget.

When doing your budget, you want keep in mind that the lender wants to see that you can pay the modified loan payment. Don’t make your budget so tight that there is no money to make any mortgage payment. The lender doesn’t want to modify your loan if you won’t have the money to pay it. So make sure to show some surplus in your budget to make the modified mortgage payment.

Generally the loan modifications can do three things: First is reduce the interest rate. It will usually step up over the first five years, e.g. first year is 2%, second year is 3%, etc. At five years, the interest rate will be come fixed for the remainder of the loan. The target interest rate will usually be in the 4-5% range. Second, a loan modification can reduce principal on loans. This is a fairly new thing. The lender will agree to reduce principal as long as you stay current on the loan. If you default, you will owe both the forgiven portion as well as the unforgiven portion. Third, a loan modification can reamortize your mortgage to 30 or, if necessary, 40 years.

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