Want to modify mortgage? Get a trial run

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As if a borrower didn’t face enough hurdles in the quest for a mortgage modification, now there is another. It’s the required “trial period” of the federal government’s Home Affordable Modification program, and it may be a feature of other mortgage modifications as well. The typical trial period lasts three months and allows the loan servicer to test the borrower’s ability to make the modified loan payment before finalizing the modification.

Loan servicers have sent out more than 300,000 letters to homeowners who might qualify for a lower mortgage payment through the government’s program, according to the U.S. Treasury Department. If you received such a letter or expect to participate in a mortgage modification program, you may be curious about the trial period requirement. Here are 10 questions and answers:

1. Is a trial period required to get a mortgage modification?
If your mortgage modification is part of the government’s program, then yes, a trial period is required. Fannie Mae’s guidelines specify a three-month trial period if your loan is already in default when the trial period starts, or a four-month trial period if your loan is current but default is imminent when the trial period starts. Freddie Mac’s guidelines call for a three-month trial period. If your mortgage modification isn’t part of the government’s program, your loan servicer’s own guidelines may still require a trial period.

2. What’s the purpose of the trial period?
The trial period is intended to test your commitment to make the modified loan payment because the servicer will not want to complete the modification if the new payment doesn’t help your situation. The trial period also allows you to make the modified payment while the lender finalizes the paperwork you’ll have to sign to complete the modification.

3. Will the trial period stop a foreclosure?
Loan servicers generally won’t push ahead with a foreclosure during a trial period. But if you don’t complete the trial period, all bets will be off. Foreclosures are subject to state laws that may dictate whether a foreclosure can be delayed during the trial period and how quickly the process may be resumed if the trial period is unsuccessful.

4. Does the trial period have any requirements other than the loan payment?
The loan payment is the primary requirement. However, you also may need to submit other documents, such as proof of homeowners insurance, and you’ll need to sign a mortgage modification agreement.

5. Can the loan servicer change the terms of the mortgage modification during the trial period?
Technically, the final modified payment or the terms of the final mortgage modification agreement could be changed at the end of the trial period if the loan servicer discovered major discrepancies between the borrower’s initial verbal conversations about his or her income and debts and the borrower’s documentation of that information. For practical purposes, this situation is unlikely to occur because most servicers review the borrower’s documentation prior to the start of the trial period.

6. Can I earn Home Affordable Modification incentive payments during the trial period?
Fannie Mae’s guidelines specify that incentive payments don’t accrue during the trial period, but they will be made up in the first month of the mortgage modification. That means if your trial period lasted three months and was successful, you’d accrue four months of incentive payments in the first month of the mortgage modification after the trial period.

7. How will credit bureaus report my payments during the trial period?
The answer is complicated and may depend on whether your mortgage modification is part of the government’s program, the status of your loan at the beginning of the trial period, whether you make the modified loan payments on time and the terms of your mortgage modification agreement.

Fannie Mae’s and Freddie Mac’s guidelines seem to suggest that if your loan was current at the start of the trial period and you made the modified payments on time, the servicer should continue to report your loan as current. If your loan was delinquent at the start of the trial period, the servicer could continue to report your loan as delinquent during the trial period even if you make the modified payments on time.

Loan servicers may have some leeway in how they report the status of a loan during a trial period. It’s unlikely that you’ll have much, if any, say in how your loan servicer handles this matter.

It’s helpful to understand that a credit report doesn’t capture all the terms of a mortgage modification. Instead, the important facts are the payment and whether you made the payment on time, says Cynthia Baker, a spokeswoman for the Experian credit bureau. A change in the interest rate on your loan wouldn’t be reported, but a change in the payment likely would be reported.

How lenders will report trial periods and mortgage modifications to the credit bureaus is far from clear, says Craig Watts, public relations director for FICO.

For instance, whether the trial period will affect your credit score will “depend on how the lender has chosen to represent that on (your) credit report,” Watts says. “What none of us knows yet is how lenders as a group are reporting the various varieties of mortgage modifications to the bureaus.”

8. Are there any other pros or cons of a trial period?
A trial period can help the loan servicer and borrower, but the concept isn’t without a few caveats.

Borrowers who begin but don’t complete a trial period will have only postponed the inevitable and spent scarce cash on housing-related expenses they might have avoided had they not attempted the trial period, says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling in Silver Spring, Md.

Yet even an unsuccessful trial period may give borrowers a measure of comfort since they’ll be able to feel they did as much as they possibly could have done to avoid the loss of their home — and then they can quit being hard on themselves, Cunningham says.

“I never like to think of the consumer beating themselves up down the road,” she says.

9. Is the loan servicer required to complete the mortgage modification if I meet the requirements of the trial period?
If your mortgage modification is part of the Making Home Affordable program, your servicer won’t receive payment for the modification from the federal government until it’s completed. That’s an incentive for the servicer to finish the process. If your mortgage modification isn’t part of the government’s program, the servicer’s obligations, if any, should be spelled out in the agreement. Some of these agreements put all the responsibility on the borrower and little, if any, on the servicer.

10. What happens if I miss a payment during the trial period?
If your mortgage modification is part of the government’s program, you’ll be required to make three payments during the trial period. There may be some leeway for late payments, but you’ll have to make all the payments before the trial period ends. If you haven’t made all the required payments by the end of the trial period, you’ll no longer be eligible for this program. You may still be eligible for other mortgage modification programs offered by your loan servicer, or you may be able to consider a short sale or deed-in-lieu as other alternatives.