Authored By: Legal Aid Services of Oklahoma, Inc.
What is a loan modification?
A “loan modification” usually refers to the process where the original terms of your mortgage are modified by a new agreement. This may involve lowering your interest rate, your monthly payment, or, if you are behind in your mortgage payments, it may involve spreading the past-due amount out over time. Some modification programs extend the length of the repayment plan so you can make lower payments over a longer period of time. These types of longer repayment plan loan modifications may cost more in the long run, but can make ongoing payments affordable. The government program that regulates this process is called HAMP or Home Affordable Modification Program.
How do you qualify for a loan modification if you are having trouble making your mortgage payments?
You must be in default or in danger of default on your mortgage. You must have obtained your mortgage on or before January 1, 2009, and your current monthly payment must be more than 31% of your gross monthly income. If you’re seeking a modification on your primary residence, you cannot owe more than $729,750 on the loan.
In addition, you must have a documented hardship, such as a loss of income, job loss, divorce, or illness, to name a few examples. You also must still have sufficient income to make the modified payment. You will need to prove your income, so be prepared to show documentation such as tax returns and pay stubs.
In order to qualify for a long-term modification you must successfully complete a 3 to 4 month trial period by making every payment on time and in full. If you fail to do this, you have to wait 12 months until you may apply for a modification again. If you are successful in the trial period, your lender must convert you to a permanent plan.
The process is generally fairly straightforward:
- you submit your documents,
- the bank evaluates per the federal criteria, and,
- you are either confirmed or denied based on those criteria.
Unfortunately, many banks have made getting a HAMP modification far more difficult than it is meant to be. Some banks will only consider borrowers who are two to three months behind on their mortgages, even though HAMP guidelines clearly don’t require this. They may “lose” your paperwork repeatedly or claim that you never sent in the requested documents.
Document everything you do to obtain the loan modification:
- Keep notes on every phone call, every email, and every action you take with your lender.
- Keep all of your originals and provide copies if the bank asks for something more than once.
In the midst of confusion about the status of your documents, some banks may pursue foreclosure at the same time they consider you for a loan modification—this is referred to as “dual-tracking.” In many cases, the modification department simply has no knowledge of what the foreclosure department is doing, or vice versa. The problem with this is that banks are not supposed to “lead you on” by making you think you will receive a modification all while moving forward with foreclosure.
Banks have a right to go through some parts of the foreclosure process while you pursue a modification, but they cannot sell your home before making a final determination on your HAMP application. HAMP requires banks to wait 30 days after sending a written notification denying a loan modification before conducting a foreclosure sale. Unfortunately, some banks have foreclosed on applicants that qualify under HAMP standards by sending a denial letter on the eve of a foreclosure sale, based on insufficient documentation, or even by telling applicants that the foreclosure process will be postponed but going forward anyway. You should talk to a lawyer if this has happened to you.
Beware of mortgage modification scams – you can apply on your own!
You can pursue a loan modification on your own. If a company is charging you to submit documents for a loan modification, it may be a scam. No reputable companies or lawyers will draft hundreds or even thousands of dollars directly from your bank account to send banks paperwork that you could just as easily send yourself. In fact, HAMP offers free counselors who will help you through the process. Legal Aid Services of Oklahoma may be able to help you with your loan modification. Find out how to apply on our website: http://www.legalaidok.org
Other options are available
If you aren’t successful in modifying your mortgage but want to save your home, a Chapter 13 bankruptcy may be an option. A Chapter 13 bankruptcy will immediately stop foreclosure proceedings and can give you time to catch up on mortgage payments that are behind. It could also give you breathing room to allow time for a modification to be approved.
You cannot file a Chapter 13 bankruptcy to stop the foreclosure unless you have regular monthly income. Your income from unemployment may be enough to allow you to file a Chapter 13 bankruptcy to save your home from foreclosure. However, whether this is realistic depends on how many more months of unemployment benefits you have and whether you will be able to get a job before your unemployment benefits run out.
A Chapter 13 bankruptcy would allow you to pay out the arrearage due on the mortgage over 3 to 5 years. During that time you would have to keep up the regular mortgage payments as well. You can file a Chapter 13 bankruptcy to stop the foreclosure any time until the confirmation of the Sheriff sale.
A Chapter 13 bankruptcy is more costly for you and more time-consuming than applying for a loan modification, so we suggest that you apply for a loan modification first. Under a Chapter 13 bankruptcy you would have to begin paying the regular mortgage payment plus an additional Chapter 13 plan payment to the Bankruptcy Trustee every month to catch up on the mortgage arrearage. A Chapter 13 bankruptcy can be filed until the day before the confirmation of the Sheriff’s sale. Legal Aid may be able to represent you in a Chapter 13 bankruptcy.
The other option is to file a Chapter 13 bankruptcy. This option is more costly for you and more time-consuming than applying for a loan modification, so we suggest that you apply for a loan modification first. Under a Chapter 13 bankruptcy you would have to begin paying the regular mortgage payment plus an additional Chapter 13 plan payment to the Bankruptcy Trustee every month to catch up on the mortgage arrearage. A Chapter 13 bankruptcy can be filed until the day before the confirmation of the Sheriff’s sale. Legal Aid may be able to represent you in a Chapter 13 bankruptcy.
Remain in the house until conclusion of the foreclosure process.
The Court will eventually grant a judgment of foreclosure. Once the Journal Entry of Judgment is filed in the case, the date for the Sheriff’s sale of your home will be set for at least 30 days after the judgment. You will be able to remain in your home until the date of the confirmation of the Sheriff’s sale, which will take place at least ten days after the sale. You will get notice of the date of the Sheriff’s sale and of the date for the confirmation hearing.