Loan Modification

A loan modification is an agreement with your lender to change the terms of your loan to make the payment more affordable. The modification is an addendum to your original loan. The purpose of a loan modification is to avoid foreclosure if you are struggling financially or unable to keep up with your payments. For some types of loans, the government may give incentives to lenders to who agree to loan modifications.

A critical factor in modifying your loan is to ensure that it will be affordable following the modification. The servicer will look at your post-modification housing expense to make sure that it is within a range of affordability, usually between 25 and 45 % of your before-tax income. In order to reach this level, lenders may lower the interest rate, extend the term of the loan up to 40 years, convert your adjustable interest rate to a fixed interest rate, forgive or delay payment of a portion of the loan balance, or waive any past fees that are owed.

The first step in obtaining a modification is to see if you are eligible for one. While you can reach out to the servicer directly to determine if you are eligible, you may want to speak to an attorney first to determine if you are eligible by analyzing your income and the loan itself.  You obtain a modification by applying with your loan servicer.

In general, you will need to meet the following requirements in order to be eligible:

• The home should be your primary residence (there are some programs for second homes but they are not as beneficial).
• You experienced a financial hardship and cannot afford your current house payment.
• You have sufficient income to afford a reasonable mortgage payment.

The lender or servicer is going to require proof of your financial condition. This will usually be tax returns, bank statements, pay stubs and other supporting documents. You will also need to prepare a financial hardship letter explaining your circumstances.

The lender or servicer has 30 days to give you an answer to your request to modify your mortgage and the 30 days begins running when you have sent in all the documents the bank has requested. You have a right to the following to assist you in the modification process:

• The lender or servicer must assign someone to handle your request and you have a right to the phone number and contact information for this person;
• You have a right to information about your mortgage account, including an itemized statement of what you owe and a payment history;
• You have a right to know exactly what mortgage company or bank owns your mortgage.

There may be companies offering to help you with a modification of your loan for an upfront fee, but you should avoid doing business with such companies. New York law forbids the collection of an upfront fee for loan modification services. The company can only collect the fee after they have provided the services to you.

A refinance is different from a loan modification. When you refinance, you do not keep your original loan, as in a modification. With a refinance, you enter into a new loan with a lower interest rate or more favorable terms. Traditional refinancing can be difficult, if not impossible, if you owe more on your loan than your home is now worth and you should consider a short sale or deed in lieu of foreclosure if you are ineligible for a modification.

Legal Editors: Thomas Tilona and K. Scott Kohanowski, City Bar Justice Center Foreclosure Prevention Project, December, 2017