DIY Loan Modification

05.04.2009 How To

While many people feel more secure enlisting the services of a professional Loan Modification expert, it is possible to apply for a modification on your own. It will take some time, thought, and math calculations, to prepare an application package. To make the process easier, we have outlined the steps for you.

Step 1. Stop and Think

Ask yourself why you are considering a loan modification. Were you denied a refinance? Do you want to stay in your home? Do you have the financial capability to make mortgage payments if they were more affordable? These are all good reasons to pursue a modification.

Step 2. Talk to Your Lender

It may be a good idea to talk to your lender and try to get an idea of what to expect, and what they will need. While there are standard requirements for a modification application, different lenders may have slightly different processes. For instance, some lenders require that applications be filled out on their own forms; while others have no such requirement. Be sure to ask your lender how long the process will take. With some lenders you can expect and answer in 1 month. Others may require 3-4 months for review.

Step 3. Prepare a Financial Worksheet

Just like when you were originally getting your home loan, the lender will need to know what your income is, as well as your monthly expenses. Create a worksheet, showing your name, address of the subject property, and loan number(s). Then state your gross monthly income (the income prior to tax or other deductions). If you are going off of an annual salary, divide that figure by 12 to derive a monthly salary. If you are self-employed, take an average from your last 2-years income.

Next, create a list of monthly expenses. This should include any and all real estate mortgage, tax, and insurance payments. List your credit card payments, school loans, personal loans, auto loans, auto maintenance, gas, grocery expenses, health bills, household expenses, utilities, alimony and child support, education, etc.

Finally, subtract your monthly expenses from your monthly income. You will have either a surplus or a loss.

Step 4. Pre-Qualify Yourself

Here you will need to do some math. Remember that when you were qualified originally for this mortgage loan, the lender had to make sure that the mortgage was within a certain debt ratio. The same goes for loan modifications. Calculate 31% of your gross monthly income and subtract out your property taxes and insurance. This leaves you with the maximum mortgage payment you can currently afford. If you need help calculating your debt ratio, call or email us.

Step 5. Modification Proposal

This step required professional analysis and not technically one that you can do yourself. The good news is that your lender may still review your file without your doing this step. However, as we found that the step plays a big role in the success of modification applications, we will describe it here for you.

Now that you know what maximum mortgage payment you can afford, it is time to create a proposal showing how the loan can be modified to meet this new payment. The loan can be modified in the following ways:

• Extend the term of your loan by "x" more years
• Reduce your interest rate to "x" amount
• Forbear an "x" portion of the Principal Balance (deferred interest-free)

In very rare cases, a lender might also forgive a portion of the principal balance. It takes complicated formulas to derive the exact "x" values that will yield the payment you pre-qualified for. Give us a call or email if you would like professional assistance.

Step 6. Financial Documentation

Most lenders will require that you submit the following documentation:

• 2-years most recent Federal Tax Returns
• 2-months most recent Bank Statements
• 1-month most recent Payroll Stubs
• If you are self employed, then a year-to-date Profit & Loss statement

Also keep in mind that as your file is being reviewed by the lender, some time will go by. So the lender may require that you submit some updated bank statements or pay stubs later on in the review process.

Step 7. Hardship Letter

In your hardship letter, you need to make clear to the lender exactly how it came to be that you no longer can afford the present monthly payment despite having promised to pay off the loan. You need to present a legitimate financial hardship. Next, tell the lender that you can commit to paying 31% of your gross income – the modified monthly payment that you calculated in the Pre-Qualification.

Step 8. Appraisal

While not always required by all lenders, it is a good idea to look into the current value of your home. If your home dropped in value, then you should present this information to the lender. The lender needs to know that should they decline the modification, you will be forced into either short sale or foreclosure, in which case the lender will take an even bigger financial loss. An appraisal or Broker's Price Opinion can be ordered from a local appraiser or Real Estate Broker that knows your area.

Step 9. Cover Sheet

The cover sheet should contain a brief summary of your scenario. You can list the following information: (1) the current home value, (2) if you owe more than your home is worth, emphasize the deficiency in bold-type, (3) your market selling conditions, (4) any shortcomings with your property that may make it harder to sell, (5) the modified mortgage payment amount from the pre-qualification, and (6) the proposed loan structure that facilitates the modified payment.

Step 10. Submission

Finally, assemble your mortgage loan modification package and find out from your lender how they want it submitted. Most lenders want packages faxed to their Loss Mitigation Department. But a few may require that you send it via certified mail.

Sending the documents as a single package, instead of separately, will help your file move more smoothly through the review process. If any documentation required by the lender is missing from the package, it will certainly cause delays.

Declined? Your Next Options

If you find out that you do not qualify for a loan modification and are over financed on you home, talk to your foreclosure prevention specialist about your next options. Ask about the Home Affordable Refinance Program. Alternately, a short sale may be the most logical next step. Your specialist will help guide you through your next steps.