Mortgage Loan Modification–5 Questions and Answers

Mortgage Modification

I get a lot of questions from folks concerning mortgage loan modifications.   Note that a loan modification is not a refinancing, and homeowners do not have the legal right to a modification.   In other words, your mortgage company isn’t required to offer you a loan modification.  And if you’re lucky enough to get a modification. you still have the same mortgage loan.

Here are the various ways to modify a loan:

  • interest rate reduction;
  • principal balance reduction;
  • extension of the term of the mortgage loan (for example to 40 years), or
  • creation of a balloon payment of the amount currently in arrears.

Recently I spoke with Dan Sullivan, who is a housing counselor and mortgage modification specialist with Action Housing, a nonprofit agency in Pittsburgh.   Here are his answers.

Question:  how long can it take to get a loan modification from a mortgage company?

Dan Sullivan:   From initial application to final decision it can take 3 – 8 months.  Smaller servicers provide answers more quickly while larger servicers have been known to take longer especially if the initial application has errors or missing documents.

Question:  what are you finding about the current rate of approval for mortgage modifications?

Dan Sullivan:   Locally we see about 40% of applicants approved.  Nationally that figure is a bit lower.

Question:  what should the homeowner expect to do in terms of gathering paperwork?

Dan Sullivan:  Standard paperwork includes an application (provided by the mortgage servicer), 4506T form (requesting tax transcripts), and Dodd / Frank disclosure, 2 months of pay stubs or profit and loss statements if self-employed, 2 months of bank statement, the prior year’s Federal 1040 tax return, and a utility bill verifying occupancy.

Question:  In Bankruptcy Court, we’ve been finding people come to us who have significant arrearages owed on their mortgage loans.  What can you say to people to prevent that?   What can you say to the people who have those arrearages?

Dan Sullivan:   It is vital that homeowners contact their mortgage servicer the moment they fall behind.  It is significantly easier to modify a mortgage that is only a few months behind than it is a loan that has been delinquent for a larger amount of time.  Modifications can be done with significant delinquencies so homeowners who have not applied should do so immediately.

Question:  can you shed some light on what the mortgage companies are looking for in terms of approving a loan modification?

Dan Sullivan:   The main hold up to loan modifications is the delinquency amount.  Modifications are math problems and the homeowners’ income has to make sense with the new amount of debt they will be acquiring after the loan is brought current.  If the amount is arrears is too large, the homeowner just might not be able to afford a modification.  Interest rate reductions and lengthening of the term are not guaranteed.  Applicants also have to have a steady source of income.  Employment, Social Security, pension all will work.  Unemployment benefits are not considered income.

 A big thank you to Dan Sullivan for this article.   I will add that in late 2012, the Bankruptcy Court in Pittsburgh (Western District of Pennsylvania) started a new program within the Court in which borrowers can file for mortgage modifications while in active bankruptcy cases.   This is a good way to ensure that you are currently making mortgage payments while you seek a modification.

If you have further questions about ways to save your home from mortgage foreclosure, please write in the comments section below!

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