I have noticed an increase of questions each week from clients and friends asking me whether loan modifications actually work or not and how to get one accomplished. Although the White House has been pushing for banks to modify struggling homeowners' loans so they can stay in their homes, and have created multiple programs to facilitate the modifications, you need to know upfront that it is a low percent of applicants who get their loan successfully modified. If you are considering whether to try a loan modification or to simply short-sell your home, you should attempt the loan modification first. Your efforts to modify your loan will show your sincerity to the bank if you do not get an approval for a modification and then request a short sale. Banks are not motivated to approve a loan modification for a homeowner that is attempting to sell their home in a short sale, so start with the modification first.
If you are struggling to make your mortgage payments each month, you need to analyze what has changed in your life since you originally signed to pay the loan. Your lienholder will require you to document the change in a hardship letter, so it's the first place to start your discussion. In most cases you can find the lender's loss mitigation requirements and how to meet the parameters to modify your loan on their website. Typically, they are looking for a major event in your life such as loss of job for extended period of time, significant illness or death in the family of primary wage-earner. Simply feeling the financial crunch that all Americans are feeling isn't enough in most cases for a loan modification.
Do some research on the various government programs so you know your options with the bank. A great place to start is the Making Home Affordable website: www.makinghomeaffordable.gov where you'll see almost everything the banks can and cannot do for your particular case. Remember, "can" doesn't usually translate into "will" do for you. Some options are refinancing to a lower rate, increasing the length of your loan term from 30 to 40 years, or banks can eliminate some of your principal (which is not done very often at all).
I highly recommend seeking the counsel of a qualified housing counseling agency. You can find a local agency at www.hud.gov and they just received another $10m in counseling grants to continue their efforts to help Americans stay in their homes. They will guide you through the process as much as possible for a minimal fee or for free. Stay away from the advertised loan modification companies that guarantee to keep you in your home for a fee. You can find more about these scam companies at www.preventloanscams.org .
Once you've identified that you meet the basic qualifications for the bank either via their website or in conjunction with the MHA programs and your HUD counselor, then it's time to contact your lender and start the process. Don't forget to take a deep breath before you make the phone call or hit "submit" on the online form. This is not an easy nor short process and it will test your resolve more than once. What appears to be a straight-forward process is long, drawn-out, and nerve-wracking. In order to prove you're really enduring a hardship with your current payment you will typically need to be 3 months late on your mortgage payment (don't skip a payment until you verify it's required with your bank). This will trigger the bank's foreclosure process and you will get daily collection phone calls, threatening letters and notices of foreclosure auction proceedings.
Lastly, develop a back-up plan in case the modification is denied. Will you be able to rally the money together to stay in the home or is losing the house your only option? Consider if a short sale is an option for you to save some of your credit rating and meet with a local Realtor to determine your home's market value in today's market. Make sure you choose a Realtor who is extremely familiar with the short sale process, can walk you through the steps, and can act quickly to stall foreclosure auctions if necessary.