Mortgage Modification

There are many reasons why you may suddenly find yourself unable to afford your mortgage payments. Borrowers may be suffering huge financial strain due to:

• Loss of a job
• Reduction in income
• Unexpected extraordinary expenses
• Incapacity due to illness or injury
• National crises, such as economic crashes or pandemics

The major hazard of missing real estate mortgage payments is the threat of foreclosure. Working with your lender to modify your mortgage can help alleviate financial pressure and get you back on track. Many people often wonder how to take care of past-due payments to avoid foreclosure.

Read on to learn about mortgage modification and how it can help you avoid a foreclosure sale.

Mortgage Basics

When you first took out the loan for your home, you probably secured the loan by giving the bank a mortgage or deed of trust on the home you bought. This relationship gives your lender a legal claim to your home. 

Under the terms of this arrangement, the lender has the power to enforce its legal claim on your home through foreclosure proceedings if you fail to live up to your side of the contract. To avoid foreclosure, you must make your payments on the loan. If the lender does foreclose on your home, then:

• Your home will be sold, either at auction or through a private sale
• The proceeds of that sale will go towards the remaining amount on your mortgage

Depending upon the state you live in, the legal relationship that you have with your lender will either be in the form of a mortgage or a deed of trust. In general, these terms are interchangeable.

You are a better candidate for a mortgage modification and avoiding foreclosure if:

• The value of your home has dropped significantly, such as during a market crash 
• You are also behind on mortgage payments

This is because the banks and lenders are less likely to recoup their losses through foreclosure proceedings. They have an interest in working with homeowners where possible to mitigate losses.

What Is Mortgage Modification?

Mortgage modification is the process by which you and your lender agree to change one or more of the terms of your mortgage contract to make your payments more manageable. It is not a refinance because it doesn't involve paying off the existing mortgage. Instead, the existing mortgage is modified but remains standing.

Mortgage modification is a type of loss mitigation, the process by which lenders help homeowners avoid foreclosure. If you're facing foreclosure, modification can also help you avoid short sales, surrendering deeds in lieu of foreclosure, and refinancing. This kind of foreclosure prevention also means your credit score might suffer a lot less.

There are many ways to modify your mortgage to make your home affordable, including:

• Lowering the interest rate of the loan
• Extending the term of the loan
• Reducing the amount of principal paid in each payment
• Temporarily suspending or reducing loan payments (known as loan forbearance)
• Adding missed payments to the loan balance

Mortgage loan modification can help achieve reinstatement of the loan by bringing your payments current. Some lenders may also require a repayment plan trial period, often around three months long. During this time, the homeowner demonstrates the ability to make the modified loan payments before the modification program is finalized.

How Do I Modify My Mortgage?

Mortgage modification sounds like a magical solution, but it requires some legwork on the homeowner's part. The mortgage modification process is a negotiation with your mortgage company. It will take perseverance and patience. The modification process starts with you:

• Contacting your mortgage lender
• Discussing the problem
• Proposing a solution

The end goal will be to reach an agreement on new terms resulting in an affordable monthly mortgage payment. An affordable mortgage payment is defined as 28% of your gross monthly income.

Before agreeing to modify your loan, your lender will require you to demonstrate financial hardship. You will need to provide a variety of different documents, including:

• Financial statements and tax returns
• Paystubs and other proof of income
• Bank statements
• A loan modification hardship letter explaining your difficulties

When assembling and submitting these documents, be vigilant and accurate. Confirm that your submission is complete and includes all requested statements. If your submission is incomplete, you risk your modification request dropping to the bottom of the pile.

Throughout the modification process, constant communication with your mortgage servicer will be key. Ask questions, clarify, and stay in touch with your loan servicer. Be persistent and follow up. This will take some effort on your part, and you may feel frustrated. However, remember the significant payoff from your efforts: financial stability and preventing foreclosure.

You can also consider taking advantage of the free help offered by government agencies. The U.S. Department of Housing and Urban Development (HUD) sponsors housing counseling agencies throughout the country that offer free or low-cost assistance.

Housing counselors, experienced in communicating and negotiating with lenders, can help you navigate the loan modification process. You can search for HUD-approved counseling agencies in your state.

Beware of Mortgage Modification Scams

There are a growing number of mortgage modification scams that target homeowners in crisis. A good rule of thumb is if an option seems too good to be true, it is. Some of the warning signs of mortgage modification scams are:

• Mortgage "counselors" who demand large up-front payments before doing any work
• Offers to pay your mortgage if you sign over the title of your home
• Anyone who discourages you from communicating with your lender
• Those who claim to know "secret federal laws" or have "secret information" that can solve your problem
• High-pressure sales tactics that feed on your fears

Some prey on the vulnerable, including desperate homeowners. Recognizing the warning signs will help you avoid falling victim to a scam.

Second Mortgages and Prioritizing Payments

The order and type of loan are dependent on when and in what order it was taken to the other loans secured by your home. For example, the first loan that is taken out on your home, which is often the loan used to make the original purchase, is called the first mortgage. This mortgage is recorded first and should also be paid off first. 

If a subsequent loan is taken out on the home, it's called a second mortgage and should be paid off second. Other loans, called home equity lines of credit, can be taken out and secured by your home as well. As with the other mortgages, the lenders for these additional loans also have the option of foreclosing on your home if you do not pay the loan back.

If your home is foreclosed and sold, the lenders are paid off in order of the seniority of their loans. This means that the lender on the first mortgage gets paid first, the lender on the second mortgage gets paid next, and so on. 

Depending on the value of your home, the lenders on a second or third mortgage might not get paid at all in the event of a foreclosure process. The holder of a second mortgage has less incentive to initiate foreclosure proceedings because they may not get paid at all.

When times get tough, it's no wonder that many homeowners have to take out second mortgages and home equity loans. Sometimes homeowners choose to take on additional mortgage obligations even in good times. This is done to gain funds for home improvement projects, business ventures, or the like. 

Faced with all of these obligations, making payments each month on these loans can be quite a financial burden. It's best to stay current with the first loan on your home and delay or make reduced payments on the subsequent loans. Often only the first and second home loan providers can foreclose on your home.

If you can pay the one or two lenders that could foreclose on your home and avoid paying the others, this could help you avoid foreclosure. By doing this, you have more money to pay your primary lenders with and, at the same time, have a better chance of staying in your home.

Get Legal Help With Mortgage Modifications

If you are considering mortgage modification, it may be helpful for you to seek legal help. Speaking with an experienced foreclosure defense lawyer can help. They'll help you understand the process and evaluate the solutions available to you.