A loan modification is often the last, best hope for millions of Americans in danger of losing their homes to foreclosure.
The way you prepare for and execute the application process will have a huge impact on how successful your request is likely to be.
Heed the advice of a trio of housing counselors who have spent countless hours laboring to make sure financially troubled homeowners get fair, sustainable loan workouts. The following five steps can put you on the fast track to keeping your house.
WORK WITH A COUNSELOR
When homeowners can't make their payments and want some sort of home loan workout, "they really need to go to a counselor, because then they will be represented," says Michelle Lewis, president of Northwest Counseling Service in Philadelphia.
When a mortgage servicer denies a loan modification or other type of workout, or when the servicer's offer of relief is insufficient, a counselor can make a counteroffer.
A counteroffer should be viewed as a "challenge," says James Jones, director of foreclosure prevention advocacy for ESOP, or Empowering and Strengthening Ohio's People, in Cleveland.
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"When we look at a person's specific situation, we have a good idea of what they qualify for," Jones says. "If it does not look like the servicer is giving them the best deal, we do challenge. That's part of our process.
"In other words, what we're looking to do is get the best workable solution to the homeowner's problem. Challenging servicers -- we do it all the time, almost daily."
Counseling agencies often have direct phone and fax numbers they can use to cut through mortgage servicers' red tape. A good way of finding a HUD-certified housing counseling agency is to call the HOPE hot line at (888) 995-4673
MAKE SURE THE WORKOUT IS SUSTAINABLE
Mortgage modifications result in lower interest rates, extended payback periods and (sometimes) forgiven debt. A modification is one way to save a mortgage. There are other types of loan workouts:
Forbearance. This allows you to skip payments or make partial payments while you go through a temporary hardship.
Repayment plan. You pay extra every month until you catch up after falling behind.
A workout has to be sustainable over the long haul, says Sue Hunt, director of housing counseling for debt counseling giant CredAbility, in Atlanta.
"Our job is to work with the homeowner to make sure that they've presented true and accurate figures to the servicer, so that the servicer can give them the best option that's available to them," Hunt says.
Hunt adds, "If we can present the case to a servicer that the original plan is not sustainable, and there's another option available, servicers will tend to do that."
HAVE REALISTIC EXPECTATIONS
Sometimes, borrowers have unrealistic expectations. That's a big mistake.
"We're looking for 'fair and reasonable' on both ends," Jones says. "We're looking for the servicer to be fair and reasonable, and we're looking for the homeowner to understand what their situation is, and expect something fair and reasonable."
In other words, counselors sometimes find themselves telling borrowers not to expect a generous handout.
Under the federal government's guidelines for the Home Affordable Modification Plan, a mortgage is presumed sustainable if the monthly payment is 31 percent of the monthly before-tax income.
Given his druthers, Jones would prefer that number to be 28 percent. But he says 31 percent is fair and reasonable.
OWN UP TO YOUR ROLE IN THE MESS
Housing counselors must summon diplomatic skills when talking with troubled borrowers. Counselors gently tell homeowners to cut back on spending. And counselors often have to prod borrowers to provide more accurate financial information to servicers.
Hunt says homeowners often report inaccurate income and budget figures to servicers and overestimate some expenses. That results in unsustainable workout offers.
"Maybe they hadn't taken some (budget) reductions that they could have, or they underestimated their income because they wanted to be on the conservative side," she says. "And while we always want homeowners to be truthful, we also want them to be realistic."
Lewis says that when a borrower inflates monthly expenses, it's important to go back into the budget, identify real expenses and slim them down.
"Usually it's a matter of coming back and crunching the numbers again, and really looking at that budget," Lewis says.
Then, the new income and budget figures are sent to the servicer, "and most of the time you are able to come back with something affordable," Lewis says.
GET FINANCIALLY LITERATE
Housing counselors have empathy for clients. But there is an undercurrent of frustration, too.
"The key to this process is they need some kind of financial literacy training," Jones says. "Yes, we get a workout, but counseling should not stop there."
Borrowers need financial coaching, with frequent checkups, Jones says. ESOP surveys its mortgage-workout clients at three months, six months and one year afterward, "just to see if they're staying on track," Jones says.
"And you'll be surprised at what we call 'frequent fliers,'" Jones says. "We get them out of trouble and the next thing you know, here they come again."
Financial literacy, Jones says, is the key to "changing that frame of mind that says, 'I see it, I want it, and I can get it, so I'm going to get it.' That whole idea has to change."