When you are facing home foreclosure, there are many ways you can still save your home if you take actions early enough. I will talk more about different ways to save your home later in separated blogs. In this blog, I am going to talk about how to use loan modification to save your home step by step by example.

Then what is loan modification?

A Loan Modification is a permanent change in one or more of the terms of a mortgagor’s loan, allows the loan to be reinstated, and results in a payment the mortgagor/borrower can afford. In the other words, borrower/mortgagor makes a request to change one or more terms on the mortgage loan.

Since you are facing foreclosure, that means you already have some PITI arrearage (that is, unpaid principle, interest, Taxes and Insurance). All or portion of the PITI arrearage can be added to the current balance of your existing mortgage in the loan modification.

By doing this, you don’t need to make a lump sum of PITI arrearage in one time now. The amount of PITI arrearage could be several thousand or more than ten thousand dollars depending on how long you did not pay your mortgage payments and how much it was per month.  Rather the dollar amount of PITI arrearage will be paid back by amortizing for many years depending on what terms the lender is going to decide.

In order for your lender to agree for the loan modification, you have to show that you have a capability to pay the new monthly payment. For example, you just got a new job after several months of unemployment and you new salary will be enough to pay the monthly payment after loan modification.

Let’s use an example to illustrate how this can save your home in foreclosure:

You have a home worth $200,000 dollars with a mortgage loan balance of $180,000 with 15 years term and 5.5% interest rate. Your monthly PITI payment is $1670/month ($1471 principle and interest and $200 tax and insurance). You have been living in this house for almost 2 years. Now, you have not been able to make your mortgage payments for last 4 months and you got a notice of default that tells you “if you do pay, you cannot stay” from the lawyer of your lender. The lender requested you pay a one time payment of $8,880 in lump sum including $6,680 PITI arrearage plus later penalty of $700 and $1,500 legal fee in order to make your loan current.

You were just wondering what you could do in order to make the loan current and keep your home.

Right at that moment, you opened a letter from a company you were interviewed two weeks ago. It was a job offer from that company and it asked you to start working next Monday. You are very happy about this good news.  But, the bad news is that the annual salary for this new job is few thousand dollar less than your previous one. The new salary only allows you to pay $1450 per month. Your excitement and happiness now are gone immediately after you realize that not only you do not have the $8,880 lump sum to pay the lender, but also you are about $220 dollar short to pay the current mortgage payment of $1670 per month.

You thought that there was no way you can save your home from foreclosure with this new job. But, you did not quit and you went online to search for solutions. You just came across this article that offered you the exact solutions you were looking for.

Following Are Step by Step on How to Do a Loan Mofication:

1.       You picked up your phone and call your lender at the phone number in the letter of the Notice of Default;

2.       You told the staff member in the Department of Loss and Mitigation that you just find a job and want to do a loan modification;

3.       The staff member asked you to show your documentation to prove you do get a new job;

4.       You sent the letter of employment from your new employer to the lender by FAX;

5.       Next day, you got a call from the bank staff member whom you spoke with telling you. He/she told you that your request was rejected because you didn’t have enough income to cover your new mortgage payment if the lender were to agree for a loan modification;

6.       You told the banker that you did the calculation and the result showed that you could still afford the mortgage payment. You wrote down calculation result as following and sent it to the lender.

a.       Request one – Add the $8,880 PTIT arrearage to the current loan balance:  Total new loan balance = $188,880

b.       Request two – Change the term from 15 years at 5.5% interest rate to 30 years at 6.5% interest rate.

The new monthly mortgage payment = $1,194

The monthly tax and insurance payment still the same $200 as before.

Total new monthly PITI payment is $1394.

If you want to do the calculation by yourself, click HERE for the mortgage calculator.

7.       You sent this request with the calculation results to the lender and asked for a reconsideration of a loan medication.

8.       Few days later, you received a letter telling that your request had been accepted after their careful review.

9.       Now, what you need to do is to wait for the lender to arrange a time to sign the new legal papers or mortgage.

10.   Before that, I want you to send other request to the lender immediately after you receive that letter and request them to waive the later fee, legal fee, or any other administration fees.

Why you can do that? You can go back to read your Mortgage Letter. In your previous Mortgagee Letter 00-05, page 21, paragraph F, “Allowable Provisions” states: “All or a portion of the PITI arrearage (principle, interest, Taxes and Insurance) may be capitalized to the mortgage balance. Foreclosure costs, late fees and other administrative expenses may not be capitalized.

So you lender cannot add amount of Foreclosure costs, late fees and other administrative expenses to your mortgage balance. But, can lender ask you to pay upfront for that? I don’t know. Can lender waive those fees for you? Yes. They may and may not. You may never know until you ask. If lender agrees for that, your monthly payment will be even lower than what we calculated above.

11.    You congratulate for not giving up lightly and for knowing how to do the loan modification. Now you and your family members have a home to stay.

In a summary, I have shown you how to use loan modification step by step to save your home in foreclosure in this example. Your case or situation may be different from this example. But, there are important points I want you to remember and you can apply those principles to your case:

1.       By modifying the loan, you can avoid paying the lump sum of the PITI arrearage upfront and spread those payment into may years;

2.       You can change shorter mortgage term to a longer term to lower down the monthly payment and make you payment affordable even your income is less then before;
3.       You can ask your lender to waive the legal fee and later fee.

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