There are reasons why you might want to modify the terms of a loan, but there are requirements you must meet in order to be eligible and things you must provide for the lender to consider your proposal. Learn how a loan modification attorney could help you through the process of preparing and negotiating with a lender and find out if employing a loan modification attorney could be a good option for you.
Written by Attorney Curtis Lee.
Updated October 8, 2021
If you’re struggling to keep up with your mortgage payments, you might consider a loan modification. This opportunity can make your monthly payments more affordable. A successful modification adjusts one or more of your loan’s terms, such as the interest rate or the repayment term of the loan. You aren’t required to have an attorney help you with a loan modification. But a lawyer’s legal advice can help you obtain debt relief if you’re facing foreclosure or if you’re uncomfortable pursuing a modification on your own.
Mortgage Loan Modifications: The Basics
A mortgage loan modification is a change to one of or more of a mortgage’s terms to make monthly payments more affordable for the borrower. Lenders may agree to modify a mortgage by:
Lowering the interest rate;
Extending the life of the loan;
Converting the mortgage from an adjustable-rate into a fixed-rate;
Combining any missed payments into the principal balance or deterring them into a balloon payment that’s due at the end of the mortgage.
To apply for a loan modification, you’ll need to meet the following requirements:
Have a mortgage that’s in default or at imminent risk of default.
Be the party that’s legally responsible for the loan. The likelihood of getting the loan modification approved goes up if you’re also the owner of the real estate that secures the mortgage.
Have a specific financial hardship that led to, or will lead to, a default on the mortgage.
Possess the financial means to make payments on the modified mortgage.
If you apply for a loan modification, you’ll also need to provide:
A current summary of your financial condition;
The estimated value of the property subject to the mortgage;
Copies of tax returns;
Proof of income, such as pay stubs;
A letter explaining your financial hardship and any documents in support. These might include medical bills, court documents (like a divorce decree), or a death certificate.
How a Modification Attorney Can Help
There’s no legal requirement that homeowners must have an attorney help them modify their mortgage loans. But having a lawyer can assist when things aren’t going well. A loan modification lawyer can also provide peace of mind. They’ll know all the ins and outs of dealing with the different mortgage companies and loan modification programs.Keep in mind that, even if a lawyer isn’t needed for the loan modification process, they could prove helpful if your loan modification attempt gets denied.
First, a lawyer can help you complete your loan modification application. They can help you avoid any mistakes when filling out the forms or providing documents.
Second, they can make sure that your mortgage lender is following all laws and rules during the loan modification process. If there’s a violation, this can provide leverage during the loan modification process. It can also help during an appeal if the lender denies your loan modification request.
Third, if you want to appeal a denial, a lawyer can explain the process and help you submit the most convincing appeal possible. And if they were representing you during the loan application process, they may already have several arguments to present in support of the appeal.
Fourth, a loan modification attorney can help you decide whether pursuing a loan modification is worth the effort involved. Maybe your financial situation means that it’s almost impossible to get a loan modification. Or perhaps there are other options to consider to avoid foreclosure. Either way, a lawyer can give you an idea of what to expect before you waste any time and effort on a loan modification.
Fifth, if you already have a lawyer representing you for a related matter, they may be able to help you with the loan modification process for a modest increase in fees.
Forums for Negotiation of a Loan Modification
There are a variety of contexts wherein a loan modification may occur. Many of these forums involve complex and intimidating processes. Having a lawyer on your side as you navigate any of them can make all the difference. This is especially true when navigating a court system or complicated government program.
Direct negotiation with the lender. The homeowner is in direct contact with the lender to modify the mortgage loan. When attempting to modify a loan this way, the homeowner should interact with the lender through written communication. This can help if there’s a disagreement about what the lender did or didn’t do at a later time.
Judicial foreclosure conference. If your home goes into foreclosure, you may wish to contest it in court with the help of a foreclosure attorney. Some state or county courts will offer foreclosure mediation where the homeowner and lender can discuss alternatives to foreclosure.
Bankruptcy loss mitigation proceedings. Some bankruptcy courts will supervise a process whereby creditors who have debts secured by the individual’s personal home may discuss whether a loan modification is possible to avoid foreclosure.
Streamline proceedings. Eligible mortgage holders can take advantage of streamlined proceedings, such as the Streamlined Modification Initiative. To be eligible, most affected mortgages need to be guaranteed or owned by Fannie Mae or Freddie Mac and be more than 90 days delinquent. This is a program whereby your lender will send you a loan modification offer. You don’t need to submit a loan modification application nor will you need to provide evidence of financial hardship.
Special loan modification programs. For conventional home loans, there are several programs that may offer loan modification. Examples include Fannie Mae’s high LTV refinance option and Freddie Mac’s Enhanced Relief Refinance Mortgage. Those with government-backed mortgage loans have special programs too, including the Making Home Affordable program (which includes the Home Affordable Modification Program (HAMP). Borrowers with VA or USDA home loans also have several programs to consider.
What Do Lenders Consider in the Mortgage Modification Application Process?
When a lender reviews a loan modification application, they’ll examine a host of factors. Most of what they look at will be financial information. But they’ll also look at your explanation of your financial struggles. When reviewing your loan modification application, the mortgage company or bank will examine the following:
Housing Expense Ratio: Sometimes called a front-end ratio, this is a comparison between your pre-tax income and your housing expenses.
Debt to Income Ratio: This is all your monthly debt payments divided by your gross income each month.
Loan to Value (LTV) Ratio: The LTV is calculated by taking the mortgage amount and dividing it by the appraised property value of the home that will serve as collateral for the mortgage.
Loan history: A mortgage lender will look at things like whether you’ve been late or missed a payment, and/or how many times you’ve applied for a loan modification.
Credit score: This is an attempt to summarize your creditworthiness into a single number. You can improve your chances of getting your loan modification request approved by improving your credit score before applying.
Evidence of financial hardship: This is your opportunity to present the “human” reasons as to why the bank should agree to modify your mortgage. Types of financial hardship that may warrant a loan modification include events like a divorce, death of a spouse, lost job, or serious medical issue.
The Lender’s Decision
After you’ve decided to request a loan modification and have submitted your application, there are 3 potential responses that the lender may provide.
The lender accepts your loan modification request and you can begin taking advantage of the more affordable monthly mortgage payments.
You’re granted a trial modification. The lender asks you to complete a trial of a few months to a year in order to determine whether you can make the modified mortgage payments on a schedule. If you’re successful and you submit additional documentation proving your financial ability to continue making payments, then you can expect the loan modification request to get approved.
The lender denies your request. There are two ways to receive a denial. You might have a soft denial, whereby the lender explains that there are still things you can do to obtain a loan modification. For example, the lender might conclude that you don’t have enough income to get approved. In that case, you can look into having another party agree to sign on to the loan with you and contribute to your mortgage payments.If you receive a hard denial, you probably can’t get a loan modification. These types of denials occur when there’s a concrete rule or requirement that is challenging to overcome. For instance, you've surpassed the number of modifications allowed over the life of the mortgage.
What To Do After a Denial
If you believe that your loan modification should have been accepted, the first thing you’ll want to do is prepare a qualified written request (QWR). This is where you’ll ask the lender for information as to why they denied the modification. The law requires the lender to respond within a set period of time, often 30 to 45 days. If they don’t, they could be subject to legal penalties, including legal fees.
Once you receive the lender’s response to your QWR, you can decide what to do next. Potential avenues to consider include:
Appealing the loan modification denial.
Submitting a complaint to a state or federal government agency.
Filing for Chapter 13 bankruptcy. If you want to keep your home, you should see if a loss mitigation program is available to you. This may provide the chance to keep your home as a part of the Chapter 13 repayment plan.
Loan modifications are promising ways to help homeowners with financial difficulties keep their homes. But to obtain a modification, you’ll need to satisfy your lender’s conditions and requirements. This is why you might want to consider having a loan modification lawyer assist you with this process. Their legal expertise can also come in handy if the lender isn’t being fair during the loan modification process, if there are other options to consider, or your request to modify your loan is part of another legal proceeding, like bankruptcy or judicial foreclosure.