Homeowners who can’t afford their mortgage payments can get a better deal from their lender. But the process is complicated and potentially onerous, and concessions are offered only to borrowers who earn neither too much nor too little income to meet the lender’s guidelines.

“If they can afford to pay, they should pay. If they can’t afford to pay, we need to make sure they have a fighting chance to make the new payments and pay back the loan over the long term,” says Thomas Kelly, a spokesman for J.P. Morgan Chase, which also owns the Washington Mutual, or WaMu, and EMC brands.

See details of the mortgage modification policies for each institution:

Payment must be affordable, but also pay off loan

An “affordable” payment typically is defined as a targeted percentage of the borrower’s monthly gross income. Thirty-eight percent is common, though some lenders use a lower or higher figure, usually between 31 percent and 41 percent. The new payment must be sufficient to pay off the loan, sometimes with the term extended to 40 years or some of the principal deferred until the loan is refinanced or the home is sold.

Some lenders also require proof that the borrower has suffered a severe financial hardship, such as a prolonged illness, disability, temporary unemployment, divorce or death of a spouse. Borrowers may be required to write and sign a “hardship letter” that explains their situation, explains Jumana Bauwens, a representative of Bank of America, which acquired Countrywide Home Loans earlier this year.

Loan modifications generally aim to achieve two specific and potentially contradictory goals, which are to:

  • Create a payment that’s affordable for the borrower.
  • Collect all or as much as possible of the original loan amount.

The types of modifications that may be on offer vary from one lender to the next, but the most common are:

  • A temporary or permanent interest rate reduction.
  • An extended payback period (usually 40 years).
  • A deferral of principal (usually at zero interest).

Though many homeowners may want their lender to write off part of their mortgage, especially if their home has declined in value, this type of modification, known as “principal reduction” or “forgiveness of debt,” is offered rarely, if at all. That’s because lenders:

  • Are naturally loath to forgo money that’s owed to them.
  • May be restricted by contractual obligations to investors who own mortgage-backed securities.
  • Don’t want to trigger a stampede of borrowers who demand a loan modification because they owe more than their home is worth.

“The reality is that loan modification programs are about preventing unnecessary foreclosures. They are not about creating great investment opportunities. In most cases, in helping someone to stay in their home, we are worsening that house as an investment opportunity,” explains Evan Wagner, a spokesman for IndyMac Federal Bank in Pasadena, Calif.

How the loan modification process works

The best way to get started on a loan modification is to pick up the telephone and call the number on your monthly mortgage statement. Some lenders also accept requests via e-mail or through an online application, though the telephone is usually the preferred means of contact.

When you make that call, be prepared to:

  • Discuss your financial situation, including your income, debts and household expenditures.
  • Explain any financial hardship that you may have suffered.
  • Hand over copies of your recent paycheck stubs and bank statements.

Keep in mind that the lender isn’t concerned about the circumstances of your original loan or your home’s current value, but rather your ability to make your mortgage payments if certain concessions are granted to you.

It’s important to be honest about your finances since inaccurate information that can’t be documented will delay the process and could preclude a loan modification that otherwise would have been offered to you, or raise false hopes that won’t pan out, Wagner explains.

“There is no upside to giving us bad income or expense information,” he says.

Some borrowers will receive a loan modification offer, subject to verification of income, by the end of that first conversation. Others will need to wait for the lender to review their situation before they receive an offer or are told their request has been denied.

How long the process will take depends on myriad factors that include:

  • How swamped the lender’s loss mitigation department is.
  • How quickly you submit your documentation and hardship letter.
  • Whether your situation meets the lender’s guidelines for a streamlined process.

“We try to have a streamlined process so we can do it as expeditiously as we can,” says Mark Rodgers, a spokesman for Citigroup.

Not all lenders have adopted a streamlined process. And if your situation doesn’t meet the guidelines, the lender can still apply a customized process to your circumstances. Even if you don’t think you’ll qualify, it’s still a good idea to call your lender and discuss your situation. You may be surprised to learn that you could qualify now even if you were told no in the past, Wagner says.

Lenders also have begun to send out ready-to-accept offers and “invitations to apply” to certain groups of borrowers in an effort to focus on those who are most likely to qualify. Typically, these letters are sent to borrowers who have made one or more late payments or who are deemed to be at high risk of delinquency because they have a subprime or payment-option mortgage or live in a state that has experienced severe economic distress.

“We are reaching out to customers through calls, written correspondence, e-mail, toll-free assistance lines and external housing counselors,” Rodgers says.

If you haven’t received a letter, you should contact your lender.

“If you don’t get a letter, it doesn’t mean you don’t qualify,” Bauwens explains.

IndyMac’s sample offer letter runs to nine pages:
  • The first page explains the terms of the loan modification offer, including the new interest rate, monthly payment and loan term.
  • The second page contains legal disclosures.
  • The next four pages are two copies of the offer agreement: One copy is to be signed and returned; the other copy is for the borrower to keep.
  • The seventh page is a Borrower Financial Statement that must be completed and signed by the borrower and returned to the lender.
  • The last two pages are a Request for Transcript of Tax Return form, which authorizes the lender to obtain copies of the borrower’s federal income tax returns from the Internal Revenue Service.

Nonprofit mortgage counselors can help

If you feel too nervous or uncomfortable to contact your lender, you can call a nonprofit mortgage counseling agency that’s certified by the U.S. Department of Housing and Urban Development, or HUD. To find a HUD-certified counselor in your area, call HUD’s interactive voice-response system at (800) 569-4287. You can also meet with a counselor in person at a public outreach event. Bring your financial information with you, and be prepared to wait because some of these events have attracted large crowds of people, according to local news reports.

If you decide to contact a foreclosure rescue specialist, be aware that many of these companies are scams and others don’t offer any services that you can’t accomplish on your own or obtain through a nonprofit agency at no cost to you.

“There is no reason to pay any upfront fee to a for-profit service when you can call the loan servicer or a nonprofit HUD-approved agency,” Bauwens says.

Be advised also that loan servicers won’t reimburse any fees you pay to these types of companies. Instead, Kelly warns, the fee “will come out of your pocket.”

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