Loan Modifications can help homeowners stay in their homes during difficult times.

With more and more Santa Clarita homeowners experiencing financial difficulties due to changing job situations and other factors beyond their control, loan modifications may be the best way for many people to reduce their monthly payments so they can stay in their homes.

What is a loan modification?

A loan modification is a temporary fix to assist with changing financial situations, not a long-term fix, nor a gift from the bank to reduce your mortgage balance to the current market value. Generally you’ll need to show some sort of recent financial hardship in order to qualify for a loan mod, such as a reduction in income (job loss, a new job at lower pay, lower commissions or bonuses, or lower self-employed income), a change in family status (new baby or divorce), medical hardship, mandatory relocation, or similar situations that would affect your family’s income.

What steps does it take to get a loan modification?

• Patience! Loan mods don’t happen overnight. It could be weeks, or it could be a couple of months, before the bank will tell you what they’re willing to offer for the new terms of your loan. Plan on spending a lot of time on the phone with the bank initially, as you get them to open your loan mod request and answer any questions that they may have. Hold times can be lengthy, so take a chill pill and hang out for a while until you can talk with a live person.
• Current Financial Information. Be prepared to go over all of your financial information with the bank’s representative, including your current income, balances in bank accounts, monthly expenses (in detail) and your projected income if you’re currently unemployed or self-employed.
• Hardship Letter. The bank may not request this in writing, but they will want to know what changed (other than the value of your home) that makes it so you can’t meet your current mortgage obligations. Be prepared to provide details in case they ask. The most common hardships are job losses or reduction in employment income and medical situations.
• Documentation. Be prepared to provide copies of your recent bank statements, tax returns, pay stubs and W-2’s. Include all pages of your tax returns and bank statements, not just the first pages. Also provide a copy of a current utility bill to show that you’re still living in the home instead of renting it out to someone else. Don’t leave any bank accounts out hoping that they won’t find them. You don’t want to be nabbed for fraud later!
• Follow-up. Check in with your bank once a week or so once you’ve submitted your request for a loan modification. This lets them know that you’re being proactive in getting this situation resolved, and it also gives them the opportunity to clear any open items that may be in pending status in your file. Do remember to verify that they have not scheduled a foreclosure auction date while you have them on the phone – this should be put on hold during the loan modification process, but sometimes this can slip through the cracks.
• Negotiation. If you don’t like the loan modification terms that you’re presented with initially, ask them to make changes!

How much does it cost to get a loan modification?

NOTHING. Zilch. Nada. Zip. You can call the bank and do this on your own. Or you can pay someone $1,000 per hour to sit on hold with the bank for you. Your choice.

If your bank is being uncooperative, first ask to speak to a supervisor to make sure you’re not dealing with an employee with attitude problems. If you have no income now and can’t show that you’ll have income in the foreseeable future, then a loan modification may not be possible, and you may need to consider a short sale instead. Do remember to be pleasant with the bank reps, they’re doing the best they can to help you out, and getting pissy with them won’t get you anywhere.

Be aware that Realtors can be of some help in getting you through the loan modification process, but generally they are not loan mod experts, nor are they allowed to collect up-front fees for this type of service. If you’re calling the Realtor who helped you buy your home, chances are they’ll be willing to help you with the first steps of the loan modification process as a courtesy. If you’re just calling someone out of the blue without any prior relationship, don’t expect them to spend hours on the phone with you free of charge. They have bills to pay just like you do, and there are only so many working hours in each day.

If decide to hire an attorney who asks for an up front fee, be sure to do your research before you get out your check book. An attorney cannot guarantee to get you better terms than you could get by yourself, regardless of what their ads may say, although some homeowners have reported good results from having attorneys assist with their loan modifications. If a Realtor asks for an up front before they’ll look at your situation, run the other way, as Realtor’s are prohibited from this sort of action.

What if you’re not willing to accept the terms of the loan modification?

Negotiate! See if the bank will change their terms. If not, then it may be time to consider a short sale instead.

Does the mortgage need to be in default before asking for a loan modification?

No, you don’t need to be late on your mortgage payments to request a loan modification. Some banks will argue that if you don’t have at least one missed payment, then you’re clearly not in trouble yet, so do be prepared to show that your ability to continue to make on-time payments will be impaired in the near future.

What about filing bankruptcy?

Many banks strictly prohibit both loan modifications and short sales if a homeowner has an active bankruptcy filing. Some will allow the bankruptcy if the home is excluded, but most will flat-out refuse to negotiate a short sale or loan modification while a bankruptcy is in progress. Some of this comes down to timing, with many bankruptcy attorneys suggesting that the bankruptcy filing be delayed until after the house situation has been resolved, either through a loan modification or a short sale. Consult a qualified bankruptcy attorney for further advice on this.

What if a short sale turns out to be the best option?

If you decide to do a short sale, be sure to hire a Realtor who knows their way around this convoluted process, preferably one who has their CDPE designation (Certified Distressed Property Expert) and some experience with short sales. Don’t worry about commissions and escrow fees on a short sale, they’re paid by the bank anyways. Hire the best Realtor you can find so you’ll have a higher chance of getting the short sale approved and closed. This is not the time to be using family or friends to sell your home, unless they have the proper qualifications and experience with short sales.

Expect to pay nothing out of pocket to do a short sale, and expect nothing in your pocket as the result of a short sale. Don’t expect (or accept) charges for “short sale service fees” that you’ll pay out of your own funds. Yes, short sales do take more time and effort to process than regular sales do, but taking advantage of the situation by charging significant service fees for short sale transactions brings up the question of ethics. Click on these links for more information on prohibited service fees, foreclosure rescue scams and short sales. 

Santa Clarita Realtor Linda Slocum is a Certified Distressed Property Expert (CDPE) specializing in the Santa Clarita Valley. You can reach her at 661.670.0349 or at Linda@SantaClaritaRealEstateBlog.com. This article is for information purposes only, and should not to be considered to be legal advice. 

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