Since the financial crisis of 2008, there are many homeowners who experience a hardship where the homeowner needs assistance with past due mortgage payments in order to avoid foreclosure. The crisis of 2008 provided an opportunity for many homeowners whereby they can get such assistance with their past due mortgage payments. This opportunity still exists today by way of a modification of the initial terms of the note on the mortgage (commonly referred to as a loan modification). The type of loan modification a homeowner can be considered for are primarily determined by entity securing the mortgage -- Fannie Mae, Freddie Mac and FHA of HUD.

The options available when seeking a loan modification includes:

This is not an exhaustive list of all options available with a loan modification

▪    Principal Reduction Reduces the principal balance of the loan to more closely reflect the fair market value trends for the property.  Option is available if your loan is not guaranteed by Fannie Mae or Freddie Mac.  Option not used often because of increasing property values.

▪    Forbearance Temporary reduction or suspension of mortgage payments followed by bringing the mortgage current in six months or less.

▪    Partial Claim The US Department of Housing and Urban Development (HUD) creates a second mortgage on the property that represents the past due amount plus legal costs which carries no mortgage payment and no obligation to pay until such time that the property is sold or refinanced.

▪    Loan Modification Past due interest and escrow shortages are rolled back into the principal balance

▪    Special Forbearance Homeowner must be unemployed and have no other sources of income; however, the account can be no more than 12 months delinquent or the special forbearance can not exceed the number of months that will result in the account being more than 12 months delinquent.

▪    FHA Home Affordable Modification Program FHA, VA, USDA insured loans offers loan modifications that reduces the mortgage payment to no more than 31% of the homeowner’s monthly income

Each of the loan modifications options carry its own set of eligibility requirements; but there is one requirement that we see over and over that the homeowner failed to meet which resulted in the loan modification application being denied.

What is the mistake homeowner’s often make when applying for a loan modification?

The initial thought is that you should portray your situation in worst possible way to increase your changes of getting a loan modification. Doing so would be a mistake and will have the opposite result than you were hoping for. The mere fact that mortgage payments are delinquent or that payments on have been slow is the first indicator that you may need the benefit a loan modification. What the lender does not know is what happened that resulted in the delinquency or potential delinquency; but, most importantly, they want to know if there has been a change that now means you have the ability to maintain mortgage payments going forward.

With the exception of the no documentation loans that were written at the height of the housing market, think about the process for applying for a home loan. The lender's underwriter reviewed/verified income and they reviewed debts to determine the debt-to-income ratio. This debt-to-income ratio was used to determine the amount of a loan you were approved for. This ratio was that your mortgage should not exceed 28%-31% of your income and the total payments on debt should not exceed 41%-43% of your total income. The same holds true when applying for a loan modification.

When applying for a loan modification, it is important to note that you should have and will want to convey that you have enough income after your non-mortgage monthly obligations available towards repayment of your mortgage.  Based upon our experience, the inability to reduce mortgage payments to 31% of gross income, or below, is the primary reason for a loan modification being denied.

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