This post continues my series on avoiding mortgage disclosure and losing your home. In case you haven’t read the previous posts in the series, you can find them here:

How to Avoid Foreclosure

Loan Modification

Now, I can tell you that the process of qualifying for a loan modification is about as much fun as a good aneurysm. Plan to spend a solid hour or so on the phone with a modification specialist. Don’t try to fit in a phone call from your cell while you’re taking the kids to soccer practice – it just won’t work.

Income and Expenses

Income and expenses are a critical part of getting a home modification trial approved. The lender wants to see that you’ll have enough money left over to make the reduced mortgage payments after you’ve taken care of your other expenses, like car notes, insurance, groceries etc.

So the modification specialist will ask you for details about your income. This, of course, includes your earnings from your job, as well as your spouse’s job. It also includes anything you or your spouse receive in child support, alimony, bonuses and  gifts from Grandma. I haven’t specifically asked about panhandling, but I imagine they’d want to know how much you make at that, too.

If you have a second job, include those earnings. If you have a side business or are self-employed, that income counts too. Basically, any income that you can verify makes you look better in the eyes of the lender, and increases your chance of getting a modification.

Then, the specialist will move on to expenses. All of your monthly bills, including utilities, car payments, daycare expenses, unicycle lessons, prescriptions, insurance (home, auto, life, health, pet) count against your income. So do living expenses such as groceries, entertainment, and dining out. However, don’t include your mortgage in these expenses (unless, of course, you own another property).

What’s left is your “disposable income” – that is, what you can afford for mortgage payments. The specialist then determines whether the lender can lower your mortgage payment to that amount, based on its allowable strategies and limitations. Maybe lowering the interest rate to 2% will get it done, or maybe extending the length of the loan will be enough to make your payment affordable.

One thing to note: You’ll have to provide documentation of most of your income and expenses. So it’s a good idea to have pay stubs, 1099 forms, utility bills, etc. in front of you before you talk to a modification specialist — that way, you know your numbers are accurate. You probably won’t have to provide grocery receipts or movie ticket stubs, but hopefully you’ve at least loosely kept track of discretionary spending. If not, it’s time to go through those detailed bank statements to find out (roughly) how much you spend on stuff other than bills.

Residency

Getting through the income and expenses bit is the hard part. You’ll need two other things to qualify for a loan modification. First, you need to prove that the home is your primary residence. That’s not hard. A utility bill mailed to the home’s address with your name on it will typically suffice. Basically, the government doesn’t want to pay lenders for modifications on rental properties.

Loan Modification Hardship Letter

The other item you’ll need is a loan modification hardship letter. Essentially, this details why you got into financial trouble and became delinquent on your mortgage payments. For some reason, people tend to freak out about this part. I’m not sure why – maybe admitting your financial problems in writing is a sticking point. But keep in mind that by seeking a modification, you’re trying to make things right. So don’t be so hard on yourself.

Anyway, a loan modification hardship letter might look something like this:

MegaMortgage

9000 Modification Way

St. Cloud, Minnesota 56302

June 20, 2010

Dear Sir or Madam:

The purpose of this letter is to explain the financial hardship that caused me to become delinquent on my payments on loan number 1982763. The circumstances that caused the delinquency have also made my current mortgage payment of $1200.00 unaffordable. My intent is to secure a home loan modification to bring the loan to current status and avoid foreclosure.

My employer moved its operations to East Timor in January of 2009, causing my unemployment. Although the employer provided a lump sum of $20,000 as a severance payment, this amount was only sufficient to meet my financial obligations through June 2009. I have been unable to locate similarly paying employment, and have taken a lower-paying position in an unrelated industry.

A home loan modification will allow me to continue making mortgage payments at a reduced rate, as shown by my income and expenses. I appreciate your consideration, and believe that granting a modification will be mutually beneficial.

Sincerely,

Mike Owens

Ok, not so hard, right? I’ll continue with the “Avoiding Foreclosure” series, although I may include another post or two in the interim on some other topics that will benefit you. Sound good? Then stick around!

Cheers,

Mike