How to Do a Loan Modification

Understanding a Mortgage Modification				• Payment Adjustment

A mortgage modification is a permanent alteration to				• Military Service
the terms of your existing mortgage. If your lender
agrees to modify your mortgage then you keep the				• Illness
same loan that you used to purchase your property
but the terms of that loan are modified. Because you				There are some things that must be on your hardship
are keeping the same loan and not applying for a new				letter. These are:
one, as you would with a re-finance, your credit score
is not relevant.				• The lender’s name and
				address
The reasons for modifying a mortgage are much the
same for both the lender and the borrower. Both				• Your loan/account number
parties do not want the property to go in to
foreclosure. Foreclosure will likely cause the lender to				• Your name
lose money and it will cause the borrower to lose the
property and damage the borrower’s credit.				• The address of the
				property that the loan is secured against
An important point to remember is that a lender will
only modify the terms of your mortgage if they believe				• Why you purchased or
that it is in their best interest to do so. Mortgages are				refinanced the property
not modified out of mercy, goodwill or pity. You need
to present a sound business proposition to your lender				• Briefly state the history of
that makes financial sense.				the loan, commencement date, payment history, (only if
				the history is good).
In order for your lender to consider modifying your
mortgage you must convince them that the alternative				• State why the loan has
(denying you a modification) will most likely result in the				fallen or will fall into arrears
ultimate foreclosure of the property. The lender will
not modify your loan if they believe that you are likely				• State that you have tried to
to continue to make payments for the foreseeable				refinance but you can’t. This is normally because
future under the current terms of the loan.				lending criteria has changed and/or the house is now
				worth less than the amount owed on the mortgage.
Any or all of the terms of your mortgage can be
modified. Here is a list of some possibilities:				• State how you plan to or
				have fixed the problem(s). This could be, “After 3
- Lower fixed interest rate for the remainder of the				months of unemployment, I have a new job but it does
mortgage				not pay as much as my previous job. I can afford a
				lower regular payment but I also need help with the
- Lower or even a 0% interest rate until a set date.				arrears so that I can get on top of the mortgage”.
Interest only periods can be as long as 10 years with
some lenders like Chase, WaMu and EMC.				For the rest of this chapter and detailed examples see
				our website
- A payment holiday until a set date
				Covering Letter
- Arrears added to the balance so as to bring your
account up to date and help your credit				When you send your bundle to the lender there will be
				a fax cover sheet first, this is supplied as a separate
- Fees and charges forgiven				document called ‘Fax_Cover_Sheet.PDF’.
				Below that will be a covering letter and it will look like
- Lowering of monthly payments by lengthening the				this:
term of the loan up to 40 years
				Your Name
- A reduction in the principal owed
				Property Address
The act of applying for a mortgage modification does
not affect your credit score in any way. Unlike a				Lender
bankruptcy or foreclosure, a mortgage modification will
not appear on your credit at all. Making late				Loan Number(s)
payments on your mortgage does damage your
credit. It is very common for a successful				To whom it may concern, (find out who to send it to
modification to remove any arrears from your account				– if not a name then a department is acceptable)
and add them to the amount outstanding on the
mortgage. This brings your payments up to date and				Attached you will find my proposal and supporting
has a positive effect on your credit score.				documentation for a mortgage modification of loan
				number #################. After an analysis
Overview of the Mortgage Modification Process				of my financial situation I am proposing that the
				following is in both our best financial interests. I am
The mortgage modification process typically takes				unable to afford the current terms of my mortgage(s)
anywhere from one to three months. However,				and will be forced to foreclose if the terms are not
these times scales can be shorter as most lenders				altered. I have taken the time and effort to produce
are rapidly putting procedures and personnel in place to				this proposal because I do not want to go in to
streamline the process. In a simplified form, the				foreclosure.
process can be summarized as follows:
				Documents Included and in this order:
• Complete the
TurboModification pack				• Mortgage Modification
				Proposal
• Contact your lender’s
loss mitigation department				• Financial Statement

• State your interest in				• Property Value Assessment
applying for a modification. Request their mortgage
modification pack (if they have one, use our generic				• Most Recent Paystubs
pack if they don’t).				(contract of employment if just started)

• Complete the pack and mail				• Last Year’s W2’s
fax it to them.				1040/1099

• Confirm that the lender				• Recent Bank Statements
servicer has received the pack
				• Hardship Letter
• Possibly have further
conversations with the representative assigned to your				Your Name Here
case
				Signature as it appears on loan document
• Accept or Reject the
modification offer				Prepare for First Contact with Lender

• Possibly negotiate the offer				If you are using an attorney then you can forgo the
further.				remainder of this document. Just send your
				completed pack to your attorney and they will take it
Companies are starting to streamline the whole				from here on. If you would like us to recommend a
modification process. It is possible that you can get a				law firm that is a member of our discount program
modification offer during your first call with your				then email your request with the name of your city
lender. Such an offer would typically be subject to				and State to
verification of your financial statement.
				By this point you should have completed the DTI ratio
Some companies like IndyMac and CitiMortgage now				calculator, the financial statement and your hardship
have an online mortgage modification form.				letter. You should now know the following:

Collate Required Documents and Information				• Current DTI Ratio

The first step towards modifying your mortgage is to				• What mortgage payment
gather all of the relevant information. Use a bound				would bring your DTI Ratio to 38% or at least to 50%
paper pad that is only used for your mortgage				or better (0% is best, 100% is worst)
modification notes. On the front page write your
name, address and mortgage account number. You				• What your current
may be asked for this information numerous times.				disposable income is
This pad will act as your written record of all contact
with your lender. Test two pens and keep them with				• What your disposable
your pad.				income will be after the proposed modification

Gather and collate all documentation that relates to				• Your hardship letter should
your mortgage and keep this to hand. Any				be complete
statements that you made during the original mortgage
application may be brought up for discussion. For				This fist thing to do is to gather your information before
example, if you stated that you earn $190k per year in				you pick up the phone. These are the items that
tips and this is no longer the case then you may need				need to be in front of you before you make the call.
to explain such on the phone. Or maybe you stated
that you had $50,000 in cash but that is no longer the				• Your notepad with two
case. You may be asked what happened to the				tested pens
cash.
				• A print-out of your fax
In a future step you will need to create an income				cover sheet
and expense statement. In order to do this you will
need your last three months bank statements and				• A print-out of your covering
make notes of all of the non-bank account and annual				letter
payments that you might make.
				• A print-out of your proposal
You will need any documentation that relates to your
income or changes in income since you applied for the				• A print-out of your signed
original mortgage. This could be anything from a				hardship letter
notice of redundancy to a divorce decree. Also
collate the following:				• A print-out of your signed
				financial statement
• Current pay stubs (at least
your most recent)				• The phone number from
				your last mortgage statement
• W-2’s or 1099 for the
last 2 years.				Bear in mind that you might be on the phone for hours
				without the ability to leave where you are sat. If you
• 1040 for past 2 years				have a portable phone then make sure that it is fully
				charged and there is an alternative available if possible.
• Bank Statements for
current and savings accounts for last two months				Some companies have streamlined the mortgage
				modification process. A visit to their website may
You need to know how much your house is worth				give you the direct number to call.
and be able to back that figure up with some sort of
proof. You can tell a realtor that you are considering				The best thing to do is to call the number on your
selling your home and they will give you a written				last mortgage statement and explain that you wish to
valuation. If you do this then you should tell the realtor				speak to somebody about the possibility of a
that you are absolutely desperate and need to sell the				mortgage modification or a mortgage loan workout.
house as fast as possible. Inform the realtor that
there will be absolutely nothing left in the house that				Here are some tips before you make the first call:
does not have to be there, e.g light fitting, stove,
refrigerator etc. You are basically trying to get as				• Be patient
low of a valuation as possible.
				• Don’t lose your temper
There is also a website called This site will give you a
valuation but it may well be higher than the actual value				• Be prepared to be put on
of the house.				hold and transferred a lot

You can also use the services of an appraiser. Your				• Write down everything that
lender will take an appraiser valuation very seriously.				happens – times, names, numbers

Calculate Debt to Income Ratio				• Be polite, this is very
				important
When preparing your financial information you should
think about what the lender will use the information				• Remember that the people
for. Lenders take a close look at your debt to				you speak to do not care about your modification as
income ratio (DTI ratio). This is the ratio between				much as you do
how much you spend each month servicing personal
debt and how much you earn. It is a calculation of				• Do not lie
the percentage of debt you are carrying in relation to
how much money you are making. This gives the				For more information see our website
lender an indication of how much additional debt you
can take on.				First Contact with Your Lender

A DTI ratio calculator is included in the pack that you				When you eventually speak to a person whose job it
have purchased. Using the calculator, add up your				is to deal with mortgage modifications you should tell
fixed monthly debt expenses such as your car				them that you need a mortgage modification and that
payments, minimum credit card payments and any				you have your hardship letter, proposal and financial
other regular debt obligations, such as monthly child				statement ready. If you have a fax machine then
support or student loans (you don't have to include bills				you may be asked to send the documents right
for things such as groceries or utilities). Add your				away. It is possible and increasingly common for
expected housing payments (your mortgage				people who are prepared, to be offered a modification
payments plus, for example, private mortgage				on their first call. This is usually subject to verification
insurance, homeowners insurance and property				of your financial statement.
taxes). The calculator will divide the total by your
gross monthly income.				It is most likely that your lender will have a modification
				pack of its own or even an online application. You will
Lenders typically say a DTI ratio should be no higher				be asked for the same information that you have put
than 38 percent. Some lenders do accept DTI				together so it will be a simple task. The lender may
ratio’s as high as 50% for customers that				accept the letter and financial statement that you have
demonstrate their ability to pay.				already prepared.

If you do not wish to use the calculator then the				At this point you are armed with all of the knowledge
formula for calculating your debt to income ratio is as				that you require to be able to discuss the modification
follows:				of your mortgage. Tell the representative that you
				know your debt to income ratio and what it would
(Total Monthly Debt Expenses / Total Gross Monthly				take to bring it down to 38%.
income) * 100
				The representative may ask you what you believe the
For example, if all of your credit card payments, loans				house is now worth. Be pessimistic here and give as
and mortgage payment amounted to $2000 per				low a figure as you can. The lender is assessing the
month and your total gross income (not your take				financial risks of you foreclosing on the loan.
home pay but the amount you get paid before you
pay tax) is $5000 then the formula would look like this:				Ask the representative about their procedure, what
				the next step is and what should you do next. Write
(2000/5000)*100 = 40				down the answer in your pad.

Your debt to income ratio would be 40%.				If you are offered a modification then and there on the
				phone, ask the representative when you will receive
The first thing that the lender will do with your				the offer in writing. If you have a fax then they may
statement of income and expenses is calculate your				fax it to you immediately. If you are told that a pack
DTI with your current mortgage terms. If your current				is being mailed to you, ask the representative when
DTI is too close to the lender’s guidelines then they				you can expect it to arrive.
may well not offer you a modification on the grounds
that you are not in financial distress and are probably				You have completed your first call and it may be your
just trying to spend less money on interest. If your				last.
current DTI is above their guide range then they will try
to bring your DTI ratio within their guide range by
reducing the monthly cost of your mortgage.
				The Mortgage Modification Package
There is a lot more information and tools available on
this step in our eBook at turbomodification				If your lender has a pack that they insist on you using
				then you should do just that. It is becoming
Make your income and expense statement				increasingly common for lenders to have their own
				packs as mortgage modifications become more and
The most important point of your income and expense				more common.
statement is to prove to your lender that you cannot
afford the mortgage as it is but you will be able to				Do not lie when completing the pack, this may preclude
afford the mortgage if it is modified. If the lender				you from being offered a modification that you would
sees that you can afford the current mortgage or that				have otherwise been offered.
you can actually afford to pay the adjusted rate that is
scheduled then the lender is unlikely to modify the				Do not delay in completing and returning the pack.
mortgage. The lender will not see the point in				You may be given the option of faxing the pack back
modifying the mortgage to terms that you can’t				in which case you will be sent a cover sheet. If you
afford either.				do fax back the pack then make sure that you phone
				the lender the moment that you have sent the fax so
It is also very important that you do not lie to your				that you can make sure that the pack was received
lender. If you do then you can be charged with fraud				and it is complete. Before you end this call, make
and may actually go to prison. Figures can be shown				sure that you ask as to when you should receive a
with particular slant that favors your situation. For				response by and make a note of the answer.
example, you can value jewelry at retail price or at
auction price. If you feel that you absolutely must lie				If you do not receive a response by the date that you
to your lender or you are afraid that you may				were told then call the lender again and again until you
incriminate yourself for a previous fraudulent mortgage				do.
application then you really should consider consulting an
attorney. Mortgage fraud is a very serious business				Learn how to Negotiate with your Lender
that can land you in federal prison.
				There are several tactics that you can use when
It's important to be honest about your finances				negotiating with your lender. The approach you take
because inaccurate information that can't be				depends upon your intentions for the property, level of
documented will delay the process and could preclude				desperation and your personality.
a loan modification that otherwise would have been
offered to you, or raise false hopes that won't pan out.				Softly, Softly, Stress Free Approach

At this point you should complete the document titled				This is where you go along with whatever your lender
‘Financial_Statement.PDF’. This will document				wishes and appear to be happy with whatever they
your net income, expenses, assets and disposable				suggest. This will give you the best chance of getting
income. The PDF should be printed and may				a modification as soon as possible and you can start
eventually be sent to your lender if they don’t have				saving money and living with less stress sooner rather
an online form or a modification pack of their own.				than later. This is the most common route.

There is a comprehensive income and expense				The Bait and Switch
calculator delivered with our DIY pack
				This is where you go along with whatever your lender
Mortgage Modification Proposal				wishes and appear to be happy with whatever they
				suggest. This will give you the best chance of getting
At this point these are the figures that you know:				a modification as soon as possible and you can start
				saving money and living with less stress sooner rather
• The value of your property				than later. Sound familiar? This is the ‘bait’
				portion.
• How much you owe on the
mortgage(s)				Once you have a modification in place you will
				probably have the ‘standard’ longer loan period,
• Your DTI Ratio				lower fixed interest rate, arrears tacked on to the end
				of the loan and any late fees forgiven. This is
• What mortgage payment(s)				acceptable to most people and they will carry on with
would bring your DTI ratio closest to 38%				the rest of their lives. However, if you really want to
				try and push your lender to the limit you can try for
• Your disposable income				more.
before the proposed modification
				Now that you have a reasonable loan that cannot be
• Your disposable income				taken away from you unless you default you can
after the proposed modification				safely ‘push your luck’ to see what else you
				can get. Start the whole process over and try to
These are all of the figures required to complete a				modify the loan that you have just modified. This
mortgage modification proposal. The next page is a				time asked for much more.
loan modification proposal example. The sample asks
for everything and is rather aggressive. You may not				This is where we get onto the subject of principle
need to ask for a principal reduction of forbearance of				reduction.....
payment (payment holiday). Remember to be
reasonable for your situation. If the representative				To learn more and see other approaches go to our
thinks that you are being totally unreasonable in what				website.
you are asking for then it may not work in your favor.
				Negotiate with your Lender
For detailed examples and instructions regarding your
mortgage modification proposal see our website				Whatever you do, do not be rude to the person you
				are talking to. This will never help you and will
Hardship Letter				probably lead to a less favorable outcome.

One of the most important documents that you will				Negotiating with the lender will almost certainly delay
create is your hardship letter. If you get this wrong				your modification and can even scupper it. Lenders
you may well be refused a mortgage modification.				have guidelines and it is from those that you will be
The purpose of this letter is to make your lender				offered what you are offered. You can expect to
believe that if the terms of your current mortgage are				pay as much as you can afford in a way that will
not modified then the loan is most likely going to go into				eventually pay off the mortgage.
default and therefore foreclosure. It is also just as
important to make your lender believe that you can				Remember, the only tool that you have is to go into
afford a lower payment. Your lender will not see the				foreclosure and they do not want that. In most
sense in modifying your loan from something that you				cases it will be better to accept what you are offered
can’t afford into something else that you can’t				and try to get more later. That strategy costs you
afford either.				nothing, trying to get too much may cost you your
				home.
Everything that you state in your hardship letter should
be verifiable. If you state that a medical condition				Do not try and get a cash-out re-finance. That is just
prevents you from working then you must have				not on the table.
proof. If you state that you cannot afford the
adjusted rate of your mortgage then you must state				Consider the Modification Offer - Accept or Decline
why. For example, you might state that when you
took out the mortgage that you were told by the				If all has gone well you are now looking at a written
broker not to worry about the adjusted payment				mortgage modification offer from your lender. If you
because you could simply refinance or sell the				feel that it is insufficient then you can tell the lender
property before the adjustment came in to effect but				such and inform them that you may no longer be able
now the market has changed and this is no longer				to make payments unless the offer improves. They
possible. This is a common scenario.				will probably make you a better offer. If they
				don’t then you can accept the offer anyway
The following are some possible reasons for hardship:				unless they withdraw it. If you like what you see then,
				by all means, accept it. Read all of the paperwork
• Loss of employment				carefully. Question anything that you don’t fully
				understand. Sign the offer and return it as soon as
• Lesser employment (new				possible. Call your lender to make sure that they
job or position pays less)				have received your signed copy and that everything is
				in order.
• Marital difficulties
				If you are turned down for a modification then it is
• Employment Transfer				important that you ask why. If you now chose to use
				the services of a legal professional then the reason for
• Inability to rent/sell				denial is the first thing that they will ask you for.

HouseBuying

How to Do a Loan Modification