Loan Modification: Basic Legal Concepts
What is a loan modification, and how will it help me with my mortgage?
A loan modification occurs when a homeowner enters into an agreement with his or her mortgage loan servicer to change the terms of the mortgage. The goal of a loan modification is to lower monthly mortgage payments to a level that homeowners can better afford, thus decreasing the risk of foreclosure. Typically, loan modification programs are targeted at homeowners whose ability to afford their current mortgage payment has declined, either due to job loss, increased interest rates, decreased home values, or other similar circumstances.
The exact provisions of loan modifications vary among loan servicers. For instance, some programs may reduce your payments and/or interest rate on your loan for a certain period of time. Other programs may make permanent modifications to your loan. Again, different loan servicers may have different loan modification programs, so you’ll need to check with your loan servicer in order to find out the terms of any available loan modification programs, or other programs designed to help you stay in your home.
Under the Homeowner Affordability and Stability Plan, loan modification will lower your monthly mortgage payment to an interest rate that is not more than approximately 31% of your monthly gross income. You will be given a trial period of three months under the new interest rate, and a new monthly payment schedule. If you are successful in making your payments during the trial period, you can enter into a loan modification that lasts five years. After five years, your interest rate will go up again at a rate of no more than 1% per year; however, your interest rate will never be higher than the current market interest rate on the date that you entered into the loan modification agreement with your loan servicer.
Furthermore, if reducing the interest rate on your mortgage loan is not enough to bring your monthly payment below 31% of your gross monthly income, then your loan servicer can use other options to reduce your monthly payments to that level. For instance, your loan servicer could forgive part of the principal balance of your loan, defer part of the balance, to be paid at a later date, and /or extend the repayment period on your loan for up to 40 years.
What is required of me to get a loan modification? Will it cost me anything?
Generally, you must contact your loan servicer about whether your mortgage loan is eligible for a loan modification under the Homeowner Affordability and Stability Plan. You should have your recent paystubs, income tax returns, and documentation of your debts available for your loan servicer to properly evaluate your loan for this program. Using the loan modification program will not cost anything; if there are any costs, such as appraisal fees, your loan servicer will add those costs onto the amount that you owe, and will waive any late fees that you owe.
What do I need to give to my loan servicer if I am requesting a loan modification?
You are likely to need the following documents for your loan modification request:
- Recent paystubs or documentation of your monthly gross household income
- Your most recent income tax return
- Documentation of any debts that you owe, including credit cards, student loans, vehicle loans, etc., which shows the amount of the debts and your monthly payments on those debts
- Documentation of a second mortgage, if you have one, including the amount owed on the mortgage loan and the monthly payment amount
- Information about any other assets that you own
- A letter of explanation as to why you need a loan modification, i.e. the circumstances that have caused your financial hardship, such as job losses, medical expenses, etc.
Will I be eligible for a loan modification under the Homeowner Affordability and Stability Plan if I am behind in my mortgage payments, but my house is not yet in foreclosure?
As long as you are otherwise eligible under the basic requirements discussed above, you have missed two or more mortgage payments, and your loan servicer is participating in the loan modification program under the Plan, your loan servicer must evaluate your loan for loan modification eligibility. There is no distinction made in the eligibility requirements in terms of whether you are current in your payments, behind in your payments, or facing foreclosure. The only distinction based on the status of your payments in the Plan relates to mandatory consideration of your loan for a modification, and certain financial counseling requirements.
The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.