The Mortgage Modification Process

Image of house sinking in water

A mortgage modification is a process by which the terms of an existing mortgage are modified by the lender, at the request of the homeowner, in order to make the mortage payment more affordable, or to help a homeowner avoid foreclosure. The mortgage modification process is very long and very involved, and it can sometimes take many months or even years to complete. Fortunately, there is FREE HELP AVAILABLE! Call (800) 757-1788 to schedule an appointment with a housing counselor.

What is a Mortgage Modification?

It almost goes without saying that your home is one of the biggest investments you'll ever make, but it's much more than that for most of us. Our home is where we find comfort at the end of the day. It's where we watch our children grow up. It's where we gather to eat dinner with friends and family. It's a safe place. But what happens if, all of a sudden, you find yourself having trouble making your mortgage payments? What if the recession resulted in a job loss or a reduction in income? What if you were in jeopardy of losing that safe haven? Fortunately, there are options.

The good news is, in most cases, banks simply don't want to foreclose on your home, and they'll do whatever they can to help you keep it. (Click here to learn more about preventing a foreclosure). It almost always makes better financial sense for the bank to help you keep your home so that you can continue to make monthly payments, and they can continue to collect the interest. If you can show that your setback was only temporary, there's a reasonable chance that you can resume your payments. In this scenario, there are even options available to you that may not only help you keep your home, but that may make the payments more affordable.

If foreclosure is unavoidable, there are options that can help keep a foreclosure proceeding from further damaging the homeowner's credit. These options can include:

  • Selling the home. This can be a good option for those who have equity in their home.
  • Short sale or pre-foreclosure sale. A short sale allows homeowners to sell their home for less than the amount owed on the mortgage. (This should only be done with bank approval.)
  • Deed-in-lieu of foreclosure. This option would allow the homeowner to basically give the property back to the lender.

These options are all better than an actual foreclosure for a homeowner whose situation isn't likely to improve, but what if your setback was only temporary? What if you got behind on your mortgage due to a job loss, but have since found another job and you just need help to bring the loan current? Or, what if you've suffered a reduction in income, but you could afford to make your payments in the future if they were reduced? In these situations, you may be eligible for a modification under either an internal plan through your mortgage company, or through a government-sponsored program. So what exactly is a mortgage modification?

A mortgage modification is exactly as it sounds. The terms of your mortgage, such as your interest rate, monthly payment, repayment term, or outstanding principle, are changed (modified) to help you remain or become current on the loan. Depending on the program, there will be certain criteria that must be met in order to be approved for a modification. Since there are many different programs, we'll focus on the most common plan, which is the government-sponsored Home Affordable Modification Program (HAMP).

Home Affordable Modification Program (HAMP)

HAMP is part of the federal government's Making Home Affordable program, an initiative designed to help struggling homeowners who were affected by the recent economic recession. Click here to visit the government's HAMP page for more information. Through HAMP, a homeowner's monthly payments are reduced so that the payment is no more than 31% of their net monthly income. There are a variety of other criteria that have to be met in order to qualify for a modification through HAMP, and it's important to note that not all lenders participate, although most have at least an internal plan that you may qualify for. Through HAMP, you'll need to be able to document that you have enough income to afford the new payment if it was approved. You'll also need to have a documented hardship to show that the reason you are in trouble is due to factors beyond your control, such as unemployment or income reduction, and that the hardship was only temporary.

The Mortgage Modification Process

If you're thinking about applying for a mortgage modification, it's important to bear in mind that it's not a quick and easy process. It often takes as long as 12 months, or more in some instances. It can be a frustrating process, too. You'll have to provide documents proving your income, an affidavit attesting to your hardship, a current record of your household expenses, recent tax returns, bank statements, and a variety of other documents that your lender may require. The timing involved in getting these documents to your lender is crucial. Typically, you'll be providing these documents to your loan service provider, not directly to the actual lender. If this is the case, your servicer will need to review a "complete package" before sending it to the underwriting department. If there is a high volume of modification requests, which is almost always the case, your application may sit "complete" for weeks or even months. If the time comes for your case to be reviewed and your documents are then more than three months old, you'll have to provide updated documents and, sometimes, start the document-collection process all over again.

For example, when you start the process, you'll have to provide three months' worth of paystubs, and you'll need to do this every three months while your modification is being reviewed. And don't ever assume that you'll receive a call from your servicer telling you that you need to send updated documents. Many servicers are overwhelmed by the volume of modification requests and simply lack the resources to provide the level of attention each account needs. You'll need to be proactive if you want to have the best chance of success through this process.

For these and a variety of other reasons, it is always recommended that you seek the help of a HUD-approved housing counseling agency to guide you throughout the entire process. They'll act as a liaison between you and your mortgage provider, ensuring that you've provided all of the appropriate documents to your mortgage company and that those documents are always up to date. Housing counseling agencies are usually funded through federal, state, and private foundation grants, so the services they provide to you are free. Click here to see a list of HUD-approved agencies in your area. If you live in Massachusetts or Connecticut, click here to contact our housing department.

What To Do While You're Waiting for a Decision

First and foremost, try to stay positive. It's easy to become depressed or anxious during this process, after all, your home is riding on the outcome of your modification request. If you entered the process behind on your mortgage or were already in foreclosure, this decision could be the difference between keeping and losing your home. At this point, try to focus on the fact that you've done everything you can to keep your house and you didn't give up.

But, while you're waiting for a decision, it's also important to recognize that you've still got a mortgage to pay! If you've entered into the process current on your loan, you'll want to stay current at all costs. Continue to make your mortgage payment on time. If you are denied a modification, at least you'll still be current on your mortgage and you won't be in any immediate danger of foreclosure. You can then focus on other ways to reduce your spending or increase your income in order to avoid future problems.

If you entered the process behind on your mortgage, it's important that you continue to make payments if you can. If your hardship was due to a temporary setback, your servicer will want to see that you're now able to make payments. There's no better way to show you can afford your mortgage than to make payments on time every month.

Depending on how far behind you are on your mortgage, your servicer may not accept payments while your modification request is being reviewed. This will generally happen if you are 3 or more months behind on your payments. What you do at this point will depend on what your intentions are. If you are denied a modification, do you have the means to get your account current on your own? Will you seek a short-sale or deed-in-lieu? Will you borrow money from your family? These are all things to consider and are best discussed with a certified housing counselor or an attorney. Generally speaking, it's always best to continue to make your payments whenever possible. Be sure to document these attempts by keeping accurate records of all payments made or attempted.

Trial Modification

If you meet all of the appropriate criteria and your mortgage provider approves your modification request, you'll most likely have to go through a trial period, typically for three months. In order for the final modification to be approved, your lender will want to see that reducing your monthly payments or loan terms actually resulted in your ability to make your payments on time.

In most cases, your payment during the trial period will be equal to what your new payment will be under the modified loan. Your lender will require that you make this new payment on-time for three consecutive months prior to issuing a final approval and permanently modifying your mortgage. This is the final hurdle, and you certainly don't want to jeopardize your modification by making a late payment. You must do everything in your power to make these payments on-time and in the correct amounts or you'll default on your trial plan and be right back to square one.

In addition to making your trial payments on time, you may also have some other requirements to satisfy during your trial period. You may need to provide proof that your property taxes and homeowner's insurance premiums are up to date. Once your trial period is over, your lender may still require more documentation prior to finalizing your loan modification. These documents will generally include recent pay stubs to prove that your income remains stable.

What Happens When the Trial Modification is Complete?

After you've completed the trial period, your lender will need to finalize the modification. This process also takes some time to complete, but it's generally much faster than the first steps in the modification process. Typically, the application will need to go through your lender's underwriting department to finalize the new terms and, in essence, "re-write"? the mortgage loan, and all of that takes time.

It is very important to remember that you must continue to make your monthly payments between the time that your trial period has ended and the time you receive your final approval. Although every lender has their own guidelines to follow, most lenders will want to see you continue making payments. Too often, people make the mistake of waiting for their modification documents to arrive from their lender before making additional payments after their final trial payment. However, failure to continue making monthly payments could result in your request being denied, and you would then be liable for any payments missed after your trial period ended. We always recommend that you check with your mortgage company, your HUD-certified housing counselor, or your attorney to determine your particular lender's policies.

Once your loan is officially modified, your lender will send you a packet of information containing the terms of your new mortgage, including your new interest rate, monthly payment, and loan terms. Be sure to read this information very carefully and follow the lender's instructions for signing and returning the documents within the required amount of time. Usually, you will have a very small window to get these documents signed and back to your lender, so be sure to act fast, but be diligent. Never sign any document without reading it thoroughly.

In the end, the best piece of advice to give people struggling to pay their mortgage is to stay in contact with your lender, either directly or through a HUD-approved housing counseling agency. The worst thing that you could possibly do is to do nothing at all.