Mod Traps

The banking and credit industries have been training the public at large for the last couple of decades. When it comes to getting a loan modification, all that training and education will do nothing but get you into trouble. Here are some potential traps to avoid when applying for a mod.

It’s a common understanding that when you apply for a loan, you must first prove that you don’t need one. You have to show your financial situation in the best possible light, so as to present as small a risk as you can to a potential lender. Conversely, in the past when things got rough, in order to get any assistance at all, we had to show that we were completely destitute, otherwise we were told that we were too well off to qualify for help. Forget these lessons completely, as this is a whole new world, with completely different rules and guidelines.

For a loan modification to be approved, things need to be presented just a bit differently, so that there is an evident need for assistance from the lender, but not so bad as to be untenable. Ideally, to qualify for a modification, you should have a verifiable reason for the request, be it loss of income, medical situation, rising payments due to an ARM loan, or some other reason that affects your ability to pay as agreed. But the key to success is that situation must be resolved.

If you were laid off 5 months ago and are still not working, this is an unresolved hardship-you will be denied assistance. However, if you were laid off 5 months ago, and have recently gone back to work, albeit at a lower rate of pay, the hardship is considered resolved, and you may qualify. The key is to present a need, but at the same time show that you have a willingness and, most importantly, an ability to make payments in the future.

Avoiding these traps will help you to avoid an unnecessary denial of your modification application, and greatly reduce the amount of time spent trying to get an approval. While the lessons of the past are not easily forgotten, learning a new trick or two will benefit you tremendously. When thinking about how to best present your case, just remember the two main goals of a mod from the lender’s perspective: Cure the current delinquency, and prevent future delinquency.

What You Need to Start the Mod Process

Every lender in the country has a Loss Mitigation department. As of right now, that department is tasked primarily with the job of reviewing loans for possible modification. While all lenders approach this task from different angles, and with different criteria, there are a few items that you will need to have ready to satisfy all of them.

The most important piece of your modification package is your Hardship Letter. No matter who your lender is, they will all ask for this, and usually before they ask for anything else. A properly formatted Hardship letter is critical to having a mod either accepted or denied, so this should be the document that you spend the most time on to ensure it is as good as it could possibly be.

Financials are the second thing asked for, and nearly as crucial as the hardship letter. What the lender is looking for is an accurate depiction of what your outgoing expenses are on a monthly basis. Everything you spend, from bills to groceries to entertainment on a monthly schedule must be represented here. This is where people often make mistakes when trying to get ‘creative’ with the budget they submit to the lender.

Supporting documents will fill out the rest of the list here. This will include paystubs, bank statements, tax returns, etc. A basic rule if thumb is to multiply everything by 2. 2 months paystubs, last 2 months bank statements, 2 years tax returns, and so on. I don’t recommend just gathering everything and sending it all to the lender though. When talking about supporting documents, only send in the documents they ask specifically for. If they ask for last years taxes, don’t send them the last 2 years. If they ask for 1 month of paystubs, don’t send your bank statements as well. Sometimes less really is more. Just make sure that you have these documents, just in case they do ask.

All lenders approach modifications differently, but all with the same goal. They want to make sure they only have to do this once, and keep from having to foreclose. Knowing what to have on hand, and how to answer their questions is the most important, and one of the mistake ridden, things a homeowner can do to ensure they get the mod they need. Getting it done takes planning and preparation, so make sure you take the time to get all your ducks in a row before the first call is made.

What effect does my Credit Report have on a Modification

I get asked all the time weather or not lenders will pull and review a credit report when considering a homeowner for a loan modification. The answer is yes and no. Unfortunately, there is no universal procedure for doing loan modifications, and some lenders will pull a credit report just to have it in the file, some will pull one and review it as if they are underwriting the loan again, and others won’t pull it at all. And some don’t do anything consistently enough to say for sure weather they will or won’t.

In my experience, credit scores are of far less importance than income and expenses in the mod process. I have seen 780 credit scores denied for modifications due to overly negative financials, while 540 credit scores with financials that show they can make the new payments are modified regularly. Lenders are aware that you are in a financial bind, that’s why you’re applying for a modification in the first place.

If you are concerned about it, I would suggest you get a copy of all 3 credit reports, so that you can see what the lender sees. That way, if they ask you about something specific, you will have already reviewed it, and can give explanations as needed. But don’t spend too much time worrying about it because it probably won’t be a determining factor in the mod decision.

Credit reports are a key factor in getting a loan, but when applying for a loan modification, aren’t nearly as important as ability to pay. You already have the loan, you just need the payments lowered, or rate fixed, or term extended. To qualify for this, your credit report is really a non-issue.