Loan modifications can make a large and costly loan more affordable by lowering the required monthly payments. Modifications may also make economic sense for lenders because the income stream from the affordable loan is better than the likely loss that the lender will have by selling at foreclosure in a down real estate market.

Homeowners who are struggling to pay or have already defaulted on their mortgage can and should take action to avoid foreclosure. While each homeowner's situation is unique, here are some guidelines on getting help.

 

1. Organize your documents and calculate your affordable monthly payment.

The better your documentation is, the more persuasive you will be in discussions with your mortgage servicer or lender. Calculate your total monthly income and expenses, and determine what you can afford for a monthly mortgage payment. Locate your tax returns for the last two or three years.

 

2. Determine your home's value.

Obtain an appraisal, either formally from a real estate appraiser, or informally from a local real estate broker. You can also find the selling price of comparable homes at your local Registry of Deeds, or use websites such as www.zillow.com or www.ziprealty.com.

 

3. Seek professional help.

Seek help from a housing counselor approved by the Massachusetts Division of Banks, a HUD-certified agency, or a lawyer experienced in mortgage issues. Discuss options such as a loan work-out, loan modification, forbearance agreement, refinancing with a new lender, refinancing under the new FHA-insured program, a "short sale" or a deed-in-lieu of foreclosure. Consider whether you have grounds to file a lawsuit; or whether a chapter 13 bankruptcy petition might be appropriate for you.

When speaking with your lender, it is usually not helpful to speak to people who handle delinquent accounts because they often lack the authority to change the terms of your mortgage. Instead, speak with someone in the "workout" or "loan modification" department. Keep detailed notes of each conversation - write down the name and contact information for each person you speak with, ask if they will keep computerized notes of your conversation and ask when someone will get back to you. If no one responds, contact the company again. Keep copies of all correspondence you send. Be cautious not to agree to "modify" or change the terms of your loan unless you are sure you can fulfill the agreement. Often servicers will refuse to agree to a second modification, even if the first one was unrealistic. Consider asking your lender or servicer these important questions about loan modifications:

  • I want to modify the terms of my mortgage to make it affordable. Can you help me? If not, with whom can I speak?
  • I want a permanent, fixed interest rate that I can afford. What can you do to help?
  • I can afford monthly payments of [$X,XXX] and can provide documentation of my monthly income and expenses. Can you refinance my mortgage to reduce my payment to [$X,XXX]? Why not?
  • The value of my home has declined from [$XXX,000] to [$XXX,000]. The mortgage balance is [$XXX,000] and you will lose money if you foreclose. What can you do to make this work?
  • I cannot afford to make a lump sum payment of [$X,XXX] to reinstate my mortgage loan. How can you help me?
  • I want to do a loan modification consistent with the Obama plan, can you help?

 

4. Utilize the 90-day "right to cure."

Under a new Massachusetts law, a servicer or lender who claims a homeowner is in default must give the homeowner written notice of his or her right to cure that default and 90 days within which to do so. This is a one-time right. The homeowner is entitled to receive a detailed accounting of the loan; however some servicers will give homeowners a computer print-out that is very difficult to understand. Tell your servicer you want a more detailed explanation of the amount you owe, including attorneys' fees, costs and late charges. Ask for an explanation of any item you do not understand. Examine any amount the lender says it put in an "escrow" account and any amounts for "forced-place insurance" or real estate tax payments. Simply because a lender says you owe an amount does not mean you are legally obliged to pay it. All costs and fees must be reasonable. If you believe any item is unreasonable or incorrect, write a letter explaining your position and ask that the charge be removed. The purpose of the new law is to give homeowners and lenders an opportunity to change the terms of the mortgage loan to make it affordable. If your lender fails to use this 90-day period to discuss a loan modification, consult a lawyer.

 

5. If necessary, seek other options, including other housing.

If you conclude you cannot afford to stay in your home even with a modification of your loan, negotiate a plan with your servicer in which you have some time to find and move into alternate housing. Some will permit you to stay in the home until a mutually-agreeable date, or will pay you a small amount to relocate. Make certain such agreements are written. Your goal is to maintain shelter for yourself and your family, but in a situation that is affordable, and to minimize the harm to your credit rating.