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Foreclosure Modifications FAQ
What Is a Loan Modification?
A loan modification is a change to a loan contract agreed to by both the lender and the borrower. The lender agrees to modify an existing loan in an effort to help the homeowner in a time of documentable hardship. The ultimate goal is to make the loan affordable for the long term. Usually, loan modifications come in the form of rate reductions, fixed interest rates and a rewriting of the loan to accommodate missed payments. Loan modifications are generally given to borrowers when they are behind on payments and have documentable hardships, such as loss of employment, illness or death in the family.
How Can I Get a Fixed Rate Mortgage?
Many borrowers with adjustable rate mortgages wish to switch to fixed rate mortgages, especially given today's low interest rates. Although that may appear to be a simple request, today's mortgages are complicated products and lenders may not be willing or able to turn adjustable rate mortgages into fixed rate loans depending on their investor guidelines. However, borrowers with high adjustable interest rates may be able to get loan modifications from lenders where the high rates have made the loans unaffordable. Starting the modification process earlier rather than later helps borrowers obtain the favorable terms, including fixing the interest rate.
What Happens if I Miss Payments?
People rarely start out intending to miss a mortgage payment, but events happen and people are often unable to make all their monthly payments. If you have missed a mortgage payment, it is critical that you act quickly. Missing a payment can be the beginning of losing your home to foreclosure. If you miss a payment, seek immediate legal assistance in arranging a repayment plan with your mortgage company. You may qualify for a forbearance or mortgage modification that puts missed payments at the end of your loan.
Connecticut has a law that protects underemployed and unemployed homeowners from losing their homes to foreclosure. The law allows the borrowers the ability to prove that their unemployed status has negatively affected their ability to pay their mortgage and that with a restructure of their loan they can save their homes. In order to qualify for this specific assistance you must prove unemployment or underemployed, but with an ability to pay and you do waive other legal rights to defend the foreclosure. This protection may not be suitable for all borrowers.
- Seek legal help in negotiating with lenders when you miss a payment.
- Do an accounting for the missed payment.
Should I Miss Payments? What Is Strategic Default?
Much has been written and publicized about the need to miss payments in order to get a lender to pay attention to a request for a modification or grant a mortgage modification. The intentional missing of a payment to get a lender's attention to a request for mortgage modification is called "Strategic Default." The theory that lenders don't pay attention to loans that are current has some validity, but it is a very risky proposition. Never skip a mortgage payment without saving the money. Many homes lost to foreclosure begin with an intentionally missed payment "to get the bank's attention." You do not have to be late on your mortgage to qualify for Obama's Mortgage Modification program. Never miss a payment on purpose or rely on strategic default without seeking experienced guidance in advance.
Why Don't the Banks Want to Help Me?
Nearly all borrowers report that lenders don't seem to want to help. Lenders are difficult to get on the phone and the representative of the lender always seems to be a different person. The bank representatives don't care, as many loans are part of large bundles of other loans or "securitizations." Your loan is just one loan in a pool of many other loans that lenders don't give your request proper attention or consideration. This is a very common experience reported by all borrowers who succeed or fail at loan modification. It can sometimes be an impossible hurdle that leads to borrower discouragement, foreclosure and lost homes.
- Take steps to separate your request from the thousands of other similar requests.
- Document and follow up all communications with a written record.
• Get legal assistance with your request for a modification.
How Can I Get the Banks to Return My Calls?
Prompt response and return phone calls are a rarity in the modification process and delay is not on your side. Whenever possible, get a direct phone line, fax line or email address so that you can follow up any request with a written confirmation of the content of a call, promises made and deadlines. Be sure to make a personal contact, confirm it in writing and don't let yourself get bounced around from representative to representative.
- Don't allow yourself to become just another unreturned phone call. Document all calls.
- Don't trust your home to a voice mail or unwritten promise. By law, mortgages can only be modified in writing.
• Keep calling your lender until someone responds positively, don't hang your future on someone else's ability to follow up.
What Is Obama's Mortgage Modification Plan?
President Obama's loan modification plan (the Making Home Affordable Program) is intended to offer a second chance to homeowners facing unaffordable home loans. It is a standardized plan that seeks to offer a way out of foreclosure for qualified homeowners. Participating lenders are given monetary incentives to offer the plan to interested homeowners. The plan seeks to lower the borrower's mortgage obligation to 31 percent or less of their gross monthly income.
The program is designed for homeowners who have experienced a serious hardship, like illness, loss of a job or divorce. To participate, homeowners must document their financial hardship and their income.
- Obtaining documents can be very challenging. The paperwork is lengthy and confusing to most homeowners. The application must be complete and accurate.
- You do not need to be late on your mortgage payment to qualify for mortgage modification. The program gives incentives to lenders to modify loans that are not yet delinquent.
- This government program for helping homeowners is largely viewed to have been terribly unsuccessful. Many lenders don't participate and many professionals believe that Obama's plan has provided false hopes to millions whereby it has actually not saved homeowners, but has led to the loss of more homes to foreclosure.
- The government has provided huge bailouts and financial windfalls to the banking industry, and it is not advisable to rely on that same government to protect your home over the interests of the banking industry.
Do I Qualify for Mortgage Modification?
Anyone at risk of default may be eligible for mortgage loan modification. While there are some guidelines for government programs and private loan modifications, anyone can attempt a loan modification. There is no requirement that your loan be in default. The real question is not qualification but success. There are many factors that go into a successful mortgage modification.
- Success in mortgage modification requires a well-conceived financial plan, a well-documented hardship and the persistence to obtain a permanent mortgage modification.
What Documents Will Be Required of Me?
When applying for a loan modification you must be prepared to document your financial hardship and ability to pay even a lower monthly mortgage payment in order to be successful. Most of the major lenders require the same documents to prove your finances and being prepared is half the battle. Before requesting your loan modification from the lender make sure to have these documents available:
- Two months of bank statements for all open bank accounts
- Signed and dated current Federal Tax Return
- Current Utility Bill
- Hardship Letter detailing why you need the loan modification and why your finances have decreased
- Filled out and executed IRS Form 4506T
- General Financial Worksheet from your lender (most refer to them as modification application, and there is a good example of one on the Making Home Affordable Program website)
- Two months of proof of income
- Pay stubs if you are a W-2 employee, operating reports if self-employed
- Please note that if you are self-employed, it is likely that you will have to provide additional documentation of your income other than the operating reports
In almost every instance it has been required that these documents be updated and resubmitted on multiple occasions. Be prepared to send and resend these documents as your lender requests. No matter how daunting a task it may be, the success to a loan modification is never giving up and always providing the documents as requested.
What Is Temporary Modification?
"Temporary modification" has become a very common and dangerous obstacle to true long-term mortgage solutions. While the government has encouraged banks to offer temporary mortgage modification through the payment of monetary rewards to the bank, the practice has, in fact, led to a false sense of a "solution" and increased home loss. Temporary modification is the process by which a bank or lender grants an "interim" or temporary solution or forbearance, whereby they take lesser payments on a temporary basis. It is not a permanent solution and only serves to create a false sense of security and a larger balance on missed or reduced back payments. By offering a temporary "peace" the bank reaps significant financial rewards from the U.S. Government, and the homeowner falls deeper behind. Ultimately, the bank ends the temporary modification, sends a bill for all the reduced payments and catapults the borrower into foreclosure and home loss.
There is no greater trap to homeowners in trouble than temporary modifications. If a modification isn't permanent, it's rescindable at will by the bank, which then follows up with a full demand for all lowered payments due immediately. Don't get trapped. It's a problem, not a solution.
- Thousands of Connecticut families lose their homes as a result of temporary modification every year.
- Any modification that doesn't have a clear finish date at the end of the loan is temporary.
- Modifications that are not in writing are temporary and rescindable at the will of the bank. Be careful.
- Modifications that are not reflected in continuing accurate monthly mortgage statements are usually temporary.
- Modifications that are not documented by court order are usually temporary and always extremely dangerous to the homeowner.
- Modifications that require further paperwork, further review, further submission, or additional court orders are usually temporary, and always dangerous.
- Temporary modifications give a false sense of security that leads to increased home loss.
What Is Principal Reduction?
This is the process wherein the lender agrees to take a reduced size of the borrower's obligation to lender on a permanent basis. Principal reduction is extremely rare and generally limited to second mortgages or circumstances where the value of the house is far below the size of the mortgage. Lenders rarely if ever forgive principal on defaulted first mortgages in Connecticut. Principal reduction is most likely to occur where the borrower can make a substantial cash payment in exchange for a release of a second mortgage. Homeowners in trouble rarely have the cash available for this option, nor would they be well-served to utilize such an option. Principal reduction is generally reserved to circumstances that involve government assistance to the lender and a secondary benefit to the borrower.
Most modifications do not come in the form of principal reduction of troubled residential mortgages and an insistence on this type of relief by the borrower is likely to undermine the entire mortgage modification process.
Principal reduction rarely if ever saves homeowners in trouble.
Can I Get a Mortgage Modification if I'm Separated or Divorced?
In a separation or divorce, the income that previously separated one household must often be used to support two. As separated or divorced spouses struggle to create a budget and make ends meet, they often find themselves facing foreclosure. When they do mortgage modification can be an option. Divorce is a stated grounds for establishing hardship under most private and government modification guidelines.
- Although separation or divorce is considered a viable hardship for purposes of mortgage modification, the crucial element to success is presenting a plan that shows that separation or divorce is a temporary hardship that can be overcome.
- Co-borrowers with separate households need to be extremely well-prepared in proposing budgets that are accurate and encouraging to lenders under a request for modification. It requires a well-planned, coordinated effort from both co-borrowers.
Can I Get a Mortgage Modification if I Have a Second Mortgage of Equity Loan?
Borrowers are often granted mortgage modifications regardless of the existence of a second mortgage or equity line even if that mortgage is in default. However, the existence of the second mortgage can complicate the modification process. As a result, you should address the secondary problem with knowledgeable professionals, but you should not let it dissuade you from seeking a mortgage modification or agreeing to a written permanent modification of your first mortgage.
- Concentrate on your first mortgage and actively seek and agree to permanent mortgage modification that only addresses first mortgage problems.
- Although second mortgage default needs to be addressed eventually, don't confuse your request for a first mortgage modification with discussion of your second mortgage problems. It all only serves to decrease your chances for a good modification. Address second mortgage problems later.
Should I Pay My Second Mortgage While Requesting a Modification of My First if It's the Same Company?
Although first and second mortgages may involve the same banks or servicing companies, most modifications don't connect first mortgage defaults with second mortgage defaults, even if it's the exact same lender. This is primarily due to the fact that lenders don't look carefully at a borrower's overall financial condition and instead take a short-term view by conforming your income numbers to your first mortgage only. This is a mistake, but it could work to your advantage.
What Happens if I'm Current on My Mortgage but See Trouble Coming?
Many people are not yet in default but see problems ahead. This is the proper time to finally evaluate your problem and determine a plan for obtaining a mortgage modification. There is no requirement that a loan be in default. Banks can renegotiate mortgages on which they are still receiving timely mortgage payments. The Obama program offers incentives to lenders to modify loans that are not yet delinquent.
- Being current should never discourage a homeowner from seeking mortgage modification. Early planning and good advice are the best avenues to a successful modification.
- Don't go into default just to get a bank's attention. It's a risky proposition that can quickly lead to home loss by foreclosure.
• Be smart. Bank representatives are erroneously suggesting people default to fast track their modification. Get legal help before you strategically default!
What Happens if the Bank Sends Back My Payment?
Banks sometimes return payments to borrowers instead of cashing them. This very often happens if a loan payment is late. If this happens to your payments, you can still save your home. Many mortgage modifications are granted even after mortgage payments have been returned uncashed. Unfortunately, returned payments are often a sign that the bank is preparing to foreclose.
If a bank sends back your mortgage payment, seek immediate experienced advice.
If a bank returns a payment instead of cashing it, be certain not to spend the money! Saving uncashed, returned payments is often the key to successfully saving a home through governmental plans or private mortgage modification.
What Is Hardship?
Any type of financial problem that happens to anyone in a household can be considered a hardship. Financial hardship is a very important buzzword to know when dealing with the world of mortgage modification. Many people often face foreclosure for reasons beyond their control. Many are underemployed or have family members who are underemployed. Their challenges can make it difficult to make mortgage payments.
A hardship determination is made to ascertain whether you have had a change in circumstances that caused financial problems, or if you are facing a recent or imminent increase in mortgage payments. Common financial hardships include: illness of a borrower or family member, loss of hours or employment of the borrower or a family member, failed business or reduced income, divorce or marital separation, medical bills or other unseen financial obligations, death of a borrower, co-borrower or family member, or seasonal income fluctuations.
- Banks mostly like to see certain forms of hardship. The best form of hardship is one that is/was temporary and whose solution can be documented.
- It is important that a hardship be presented as solvable and not permanent or impossible to overcome. Banks respond best to financial solvable hardships and not personal disasters.
- Many financial hardships occur to financial contributors to the household and not the borrower or co-borrower. It is imperative to properly explain and document hardship requests that involve multiple sources of household income, including seasonal downturns in household income.
What Is Foreclosure?
Foreclosure is the State Court legal process whereby the lender, tax authority or secured creditor takes back title to your house. It starts with the service by a sheriff of a foreclosure writ, which need not be served to you in hand, but instead is left at your property. The rest of the process happens in the county courthouse with notices sent by mail only. The court system requires that you file an appearance to assure receiving notice of all actions by all parties to the foreclosure. In Connecticut, foreclosure takes between three and six months and can be further delayed or stopped by competent legal action, including foreclosure defense and bankruptcy.
Foreclosure is a lawsuit commenced by your lender that is intended to take your home. Seek immediate and experienced legal advice or representation if you are threatened with or undergoing foreclosure.
Foreclosure is just the beginning of a solvable and somewhat prolonged process. Don't panic. Instead, get prompt, experienced help.
If I Am in Foreclosure, Will I Lose My Home?
Not necessarily! Thousands of Connecticut residents in foreclosure save their homes every year. Don't rely on a bank, government agency or out-of-state website to save your home from foreclosure. Get legal advice. Many other alternatives fail to respond adequately or customize a response to your particular needs. Furthermore, discussions outside of the court process don't stop the court process. Unfortunately, many banks give people a false sense of impending resolution while the banks speed forward to take away your house through the legal process. No amount of discussion stops the court process.
- Connecticut law offers mandatory mediation on nearly all house foreclosures. This allows homeowners to present their case for mortgage modification to the lender at the courthouse.
- While foreclosure is extremely dangerous and stressful, it is also an opportunity for well-prepared homeowners to present their case for modification to the lender's attorney. Prompt, experienced legal representation saves homes, and quick response to a foreclosure can actually be a great opportunity to get proper help and save your family home.
- Don't despair — There are many ways to stop foreclosure and succeed in modifying your mortgage.
Should I Seek Legal Advice?
ABSOLUTELY! Whether you're in foreclosure or not, a properly qualified attorney has the experience to assist you and maximize your chances for success. Remember, a foreclosure action is a lawsuit, and with every lawsuit your best offense is good legal assistance! Financial problems that involve your home are legal issues and an experienced Connecticut attorney can save your house. Don't rely on the assurances of nonqualified "experts," out-of-state companies or "friends" who have limited knowledge or experience of the law. All foreclosure problems are difficult; your situation is specialized to you and needs to be treated with an importance and uniqueness that is specific to your exact problem and the proper solution.
What Are My Legal Options?
Connecticut has various laws to protect homeowners from foreclosure. They include the right to de-accelerate your loan by arranging for back payments, underemployed or unemployed, foreclosure protection and mediation. Mediation in court has become an excellent option available to all Connecticut residents who take proper advantage of the state law protection for homeowners. There are also various legal defenses to combat modern day lending and foreclosure abuses. There are also federal laws that are available to rescue Connecticut residents from losing their home through foreclosure.
Should I Pay on Any Second Mortgage if I'm not Paying on the First Mortgage?
There really is no advantage to paying on a second mortgage if you aren't paying on the first mortgage. But you always need to be sure that you are saving the money you didn't pay to the second mortgage or the first mortgage holder. While it's never good to miss any payments, paying on a second mortgage while you don't pay the first mortgage doesn't really accomplish anything useful toward saving your home.
Many people make payments on second mortgages while not paying first mortgages because they really don't want to be behind on any bills, and therefore, pay the second mortgage despite the fact that it uses precious resources and won't help save their home or get a modification. Although long-term solutions require relief on all debt fronts, mortgage companies often ignore second mortgages or other debt entirely when they review applications for modification.
Saving money by defaulting on a second mortgage or credit card obligations may be a very positive move for people seeking to save their homes and/or obtain a modification. As with many other financial matters, any attempts to save a home or missed payment should involve the assistance and advice of an experienced professional and a well-thought-out plan for financial recovery.
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