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Restructure & Modification of a Mortgage

by Daria Kelly Uhlig, studioD

If financial hardship has made it difficult or impossible to pay your mortgage, a loan modification may help you stay in your home. Although many factors influence your eligibility for modification, programs are available to homeowners with most loan types, including conventional loans and those backed by Freddie Mac, Fannie Mae or the government. These programs restructure your loan to make the payments more affordable.

Getting Started

Your first move should be to contact your loan servicer to report that you're having trouble making payments. Have your account number on hand when you call. It's also helpful to write down the reason for your hardship, and the goal you hope a modification will achieve. Common reasons for hardship include job loss, medical expenses and divorce. Your goal is to remain in your home by making your loan more affordable. Also write down any questions you have before the call. During the call, jot down the date and the representative's name. Also write down the representative's instructions for the actions you need to take, and verify them before you end the call. Between calls, write down questions you need to ask. A loose-leaf binder with pockets can help you keep your notes and information organized.

Information Gathering

Modifications require meticulous documentation, and it's vital that you respond quickly to the loan servicer's requests for information. MakingHomeAffordable.gov notes that you'll need your most recent mortgage statement, statements for any other home loans, your two most recent pay stubs and those of anyone else responsible for paying the mortgage, proof of other income, checking and savings account statements, your most recent credit card bills and your two most recent tax returns. You also may need to submit a hardship letter that explains the reason you can't pay your mortgage. Explain fully, but succinctly, and focus on the facts of your situation. Have this information on hand before you call your lender, if possible, but don't delay the call because it's not readily available. Store copies of all submitted documents, as well as letters and print-outs of emails, in your binder.

Reducing Your Payments

Lenders have several options for restructuring your loan. The goal for most of these programs is to lower your total home payment to not more than 31 percent of your gross monthly income. Reducing the interest rate by refinancing makes the loan less expensive now, and over the life of the loan. Extending the term of the loan costs you more in the long run, but payments are lower because they're spread out over a longer period of time. Although most modifications do not reduce the remaining balance on your loan, lenders sometimes do forgive a portion of the principal. If this seems to be an option for you, contact a tax professional to discuss the possible implications.

Standard Modification Programs

Most conventional loans, including those backed by Fannie Mae and Freddie Mac, are eligible for the Home Affordable Modification Program. Loans backed by the Federal Housing Authority, Veterans Administration or the Department of Agriculture may be modified under programs that focus exclusively on those respective loan types. In addition, most large lenders, such as Wells Fargo and Bank of America, as well as many smaller lenders, have proprietary programs to help individuals who don't qualify for government-sponsored modifications.

Modifications for Special Circumstances

Not all homeowners qualify for the standard HAMP, FHA, VA or USDA modifications. Unemployed individuals, for example, seek modification through the Home Affordable Unemployment Program that can reduce or temporarily suspend payments. Homeowners who've received modifications for a first mortgage may qualify for a second lien program that modifies their second mortgage as well. If your home is worth less than you owe on your mortgage, you may qualify for the Home Affordable Refinance Program, or, if you have an FHA-insured loan, an FHA Refinance for Borrowers with Negative Equity. The FHA also has a program for second mortgages. The Principal Reduction Alternative helps homeowners whose homes have experienced drastic declines in value. Additional assistance is available to homeowners who live in the states that were hardest hit by the housing crisis.

The Modification Process

The mortgage company representative you first speak with will begin screening you for modification eligibility. The next step is to follow the lender's instructions for submitting your hardship letter, financial documentation and any application forms the lender requires. You'll enter a trial period after the lender determines your eligibility. You must make on-time payments during your trial period. If you complete it successfully, you'll receive your permanent modification. Contact your lender for other options if you don't complete the trial, or you choose not to participate.

About the Author

Daria Kelly Uhlig began writing professionally for websites in 2008. She is a licensed real-estate agent who specializes in resort real estate rentals in Ocean City, Md. Her real estate, business and finance articles have appeared on a number of sites, including Motley Fool, The Nest and more. Uhlig holds an associate degree in communications from Centenary College.

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