Loan Modifications

A loan modification gets you back on track, rarely requires money out of pocket, and enables the dismissal of the foreclosure, preventing the sheriff's sale.

How does a loan modification work?

A loan modification works by lowering your monthly mortgage payments so your loan is more affordable.  It is a process where your mortgage lender voluntarily agrees to accept less money from you over the course of the loan.  Why would it do that?  Because otherwise you may not be able to pay your mortgage back at all.  If you cannot pay your mortgage, then the mortgage company may take a loss in a foreclosure.

 

The goal with many loan modifications is to get your payments affordable.  "Affordable" means that your mortgage payment is about a third of your gross monthly income.  For example, if you earn $3,000 a month before taxes, then the mortgage company will want to try to rearrange your loan so the new payments are $1,000 a month.

What are the loan modification requirements?

The primary loan modification requirement is a decrease in income.  We generally see a decreased income from job loss, pay cut, divorce, or an illness or injury that caused you to miss work.  Covid-19 has hit income hard.  A decrease in income means your current mortgage payments are no longer affordable.  

 

A loan modification must also be allowed by the owner of your mortgage (usually a trust).  Sometimes those are allowed under specific conditions.  One condition might be that the loan modification must be more profitable in the long run to modify the loan rather than foreclose.  If its more profitable to foreclose, expect the run around with your loan modification request, and then a foreclosure if you do not retain a lawyer.

3 Months

The average amount of time it takes to get a loan modification offer.

3 Months More

The term of a trial payment plan before the modification becomes permanent.

45 Days

The amount of time prior to a sheriff's sale you have to get in your complete application to stop the sale by law.

What can a homeowner expect from a loan modification?

A homeowner can expect to save their home from foreclosure with a loan modification. That is usually the primary objective of most homeowners looking for a loan modification. Most homeowners who seek a loan mod can’t make the original loan payments because their income dropped.  A loan modification makes the payments affordable again.

A homeowner’s experience will vary greatly in trying to obtain a loan modification. Some mortgage servicers are great to work with, and others are terrible.  Unfortunately, you will probably not know kind of modification you will get until it is actually offered to you. The modifications also vary greatly. The kind of loan modification you get will depend on the loan owner, the servicer, the lawyers (if involved), and even the particular underwriter looking at the file.

Some mortgage companies will offer a reduced interest rate. Other loan modifications will reduce the fees/costs added since default. Few will wipe away part of the principle, but others will structure the loan modifications so some of the balance is deferred to the end of the loan. That is called a balloon.

You should also expect that the loan modification process can be time consuming and take months to complete. If your mortgage company has filed foreclosure while you wait for a loan modification response, call us at (614) 221-9800.  If your mortgage company has filed foreclosure, you should obtain an attorney immediately and ignore any advice from them that counsel is not needed.  We have seen too many homes lost because of bad mortgage servicer advice.

Can the bank foreclose during a loan modification?

The bank is not allowed to foreclose while it is processing a completed loan application. The bank cannot foreclose during the period that you are paying on a loan modification, either. This is prohibited by federal law under RESPA.  However, although RESPA prohibits this activity, a lot of mortgage companies do it anyway.  Many mortgage companies and their lawyers are too big or too busy to ensure you don’t lose your home during a loan modification request.

The law surrounding RESPA is a bit technical, and not too many foreclosure defense lawyers know how to employ it. However, we do. We even created some major case law at the federal court of appeals regarding RESPA. Give us a call even if your home was sold while a loan application was pending.  Even if we cannot reverse the sale, we might be able to get you some damages. Call us now at (614) 221-9800.

Can a loan modification stop the foreclosure process?

Yes! A loan modification can stop the foreclosure process. At least it is supposed to under federal law.  The law is that if you get a completed loan application into your mortgage company at least 45 days before the scheduled sheriff sale, the lender must pull the sale and first underwrite your loan for a loan modification. You cannot have requested a prior loan modification within the past 12 months.

Although this is the law, as referenced above, many mortgage companies do not follow the law here either. Thus, you may need to involve a knowledgeable foreclosure attorney to either unwind the sale (harder at the sale stage), or sue for damages. 

We regularly work with foreclosure clients to obtain loan modifications. 

No Dual Tracking

The mortgage company's lawyers are prohibited from continuing with foreclosure once you have submitted a completed loss mitigation application.

RESPA

The federal law that strictly governs the loss mitigation process.  Our firm does a lot of work under this code because mortgage servicers are always failing in their duties.

120 Days

The amount of time you must be delinquent before the bank can foreclose, to give you time to work out a deal.

Can you sell your house if you have a loan modification?

Yes! You are allowed to sell your house if you have a loan modification.  The important part of the sale is paying off the mortgage.  So long as you do that, you can sell the home with no problems.

How does a loan modification affect my credit score?

A loan modification may or may not affect your credit score, depending on how the bank reports your loan. If the bank reports the loan modification as “settled less than full amount” or “paying less than agreed,” then it will negatively impact your credit.

However, if your lender simply reports the change in payment and balance, then it may not affect your credit score. You may want to talk to your mortgage company during the process to ask them how they report loan modifications to the credit scoring agencies. Just make sure you get their response in writing! That way we can enforce their representation later, if needed.

Keep in mind that if you get behind on your payments, that will show up on your credit report and late. A loan modification does not erase past negative history. Also, if you enter into a temporary payment plan (while waiting for the final modification), then you may find your credit takes a hit during the months that you are paying less than your regular payment.  The credit reporting agency Experian has a good page with some additional information here

Documents you will need to apply for a loan modification

Income Documents

Paystubs and verification of other income.  P&L and tax returns for self-employed borrowers.

Assets

Bank statements.  We usually redact retirement account information with a statement to that affect, as these funds are protected from creditors under Ohio law.

Hardship Letter

The bank may want to know what happened for your income to decrease.  Avoid admitting default or sharing information that could be used against you later.  Passive voice is good.

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