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Five Easy Steps To Modifying Your Loan

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Five Easy Steps To Modifying Your Loan

The housing crisis has been hitting homeowners hard since 2007. The number of homeowners facing foreclosure is staggering. Nearly 15% of homes are in some sort of foreclosure proceeding. One out of three homeowners are "underwater" in the value of their home, meaning they owe more than what their property is worth.

The key to bringing the economy back is to stabilize the real estate market, which is why President Obama moved quickly to establish programs to help homeowners. In April of 2009, President Obama enacted the "Making Home Affordable Plan" or HAMP. This plan is to enable homeowners to modify their existing mortgage with their lender or servicer. If the borrower is behind on their payments, they can apply for a loan modification to lower their interest rate, reduce their principal, and/or eliminate back payments and penalties.

Even though the plan was meant with good intentions, there are still problems that need to be ironed out between the homeowners and their lenders.

o Lack of communication o Not enough technical support to meet the demand of applicants o No follow-up by the lender on paperwork submitted from the borrowers

The loan modification process can be very frustrating to a homeowner, especially if they are close to losing the roof over their head. However, it is still necessary to take advantage of the HAMP program if one is behind on their mortgage. Here are five steps to making that process easier:

1. Have an organized package - Most lenders and servicers require the same documentation. They want a hardship letter detailing why the borrower ended up in default. A financial worksheet is also needed showing the borrower's monthly income and expenses (I will explain a little later how to put both of these documents together). The borrower must also submit their most recent paystubs, bank statements, and tax returns to show the lender that they have the ability to pay the modified payments.

It is very important to collect and submit all of these documents in a complete package. You want to make it easy for your file to be processed in a timely fashion. If not, you run the risk of having your loan take several months to be reviewed which may cause your home to go into foreclosure, your application denied, or more interest and penalties added to the back of your loan.

2. Get your finances in order - The lender wants to see that you have overcome your hardship and you are able to pay your new modified payments. A part of the loan modification process is to submit a verbal or written financial worksheet. This worksheet will detail your monthly income and expenses. Most lenders want your current mortgage payment to be over 31% of your gross monthly income to be considered for the HAMP program. They will modify your payment down to 31% or less of your monthly payment by lowering your interest rate or reducing your principal. So for example if your gross monthly income is $5,000 per month, and your mortgage payment is $2,500, the lender will modify your mortgage payment to $1,568 per month.

If your expenses are too high, like your credit card payments and utility bills, look to cut those expenses so that your debt to income ratio is not too high, which will cause you to be denied for a modification.

3. Learn to contact the right department - There is a lot of miscommunication when you're dealing with your lender. There are countless numbers of 1-800 numbers to call and various people to talk to. This can be very frustrating when you're dealing with a small amount of time and a lot of pressure.

The loss mitigation department handles the loan modification for the lender. When you call customer service, ask for this department. It is wise to get the direct number to loss mitigation, their fax number, and the name of the negotiators handling the file. Document the date, time, and the person you spoke to each time you follow up on your file. Therefore if any problems arise, you are on top of the situation.

4. Present a good hardship - Bad things happen to good people, especially during this economic crisis. When you apply for a loan modification, you have to document what caused you to fall behind on your payments, when it happened, and how it impacted your finances. Reasonable hardships are loss of employment, sickness, tenant problems, and reduction in income.

Include in your letter how you have overcome your hardship; like a new job, improved health, increased salary and how you want the lender to modify your payments.

5. Be prepared to be reinstated - After all of the time you have spent documenting your paperwork and crunching numbers to have your loan modified, you must be ready to make your new payments. With the HAMP program, the lender will place you in a three month trial period in which you pay the modified payment. After that period, once the lender sees that you have demonstrated the ability to pay the modified payment, they will make the payment permanent.

Be able and willing to make these payments, if not you will be denied and not considered for any future plans. If you are not able to make the modified payment, resubmit your application to be considered with an adjusted financial worksheet.

The worse thing to do when you are behind on your payments is to do nothing. There are many options to take besides a loan modification such as a short sale, deed in lieu of foreclosure, or a chapter 13 to reorganize your finances. Also if you are not able to work on your application, seek help from a lawyer, non profit agency, or a real estate professional.

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