What is a Loan Modification?
Basically, a loan modification is a modification to an existing mortgage where the lender agrees to extend the loan term, forgive some of the debt or add the defaulted debt to the back end of the loan.

Who Qualifies for a  Loan Modification?
A homeowner who is in default on their mortgage payments or about to go into default or pre-foreclosure. At present, the borrower must show a financial hardship which can be various reasons such as loss of income or reduced income, a divorce, death in the family, or property value declines. The modification works best on variable interest rate loans that can be reduced at least 1 point.

Loan Modification Process
To start the process, the homeowner or their representative such as an attorney, mortgage broker, housing counselor or loss mitigation company will need to contact the lender and find out if the borrower qualifies for a modification. Each lender has different procedures and forms, but generally the process goes as follows:

The homeowner must submit a hardship letter, authorization letter if they want a third party to negotiate the loan modification on their behalf, last two paycheck stubs, last two months bank statements, a borrower’s financial statement, and last two years’ tax returns, 1099’s or W-2 statements.

It may take several follow up telephone calls with the loan modification or loss mitigation department of the lender or loan servicer to get a negotiator assigned to the request. The entire process can take 30 -60 days or longer. That is why it is smart to start early before the lender has filed any foreclosure actions and let them know the borrower’s financial situation.

The negotiator will present an offer to the borrower and the borrower has the opportunity to counter the offer or accept it. The borrower must have sufficient income to be able to pay the new mortgage payment. So if you do not have any income, you will not qualify for a loan modification.

How Will the President’s New Home Plan Help?
The President’s new home plan calls for the Treasury’s Troubled Assets Relief Program (TARP funds) to spend $75 billion to restructure loans of homeowners who are in default on their mortgages or about to be. An average foreclosure costs the lender about $50,000. So since foreclosure is expensive, lenders have been trying to work with borrowers to avoid the issue in the first place. However, the way the current loan modifications have been going, the lenders really have not been rewriting the borrower’s loan enough to help, and many borrowers have been falling behind again in six months and back in the same position of losing their home. So for the most part the old way of doing loan modifications has been failing.

How the new plan will work is the loan services or lenders will be paid $1,000 for each loan that they cut the interest rate on to reduce the debt to income ratio of the borrower to no more than 38%. If the lender is able to further reduce the borrower’s debt to income ratio below 38% to 31%, the government will pay both servicers and borrowers up to $1,000 a year for three to five years for keeping their loan current. The program is voluntary. The Treasury will not subsidize loans that reduce below 2%. The plan only applies to loans on primary residences and not to investors, and only applies on conforming loans $417,000 and under.

There has also been some talk about having Congress modify the bankruptcy laws to let bankruptcy judges write down mortgage debt if the mortgage modification plan does not work.

Let’s hope the new plan helps targeted homeowners save their homes from foreclosure.

As always, thanks for reading this post and if you enjoyed it be sure to comment below. Also, check out our FREE 2009 Loan Modification Guide: Saving Your Home From Foreclosure.