New York is one of the states most seriously affected by the current foreclosure crisis prevalent across the USA. What is more, in New York alone, nearly 50 percent of mortgages are upside down, that is, the borrower owes more than the property is worth — probably due in part to the levels reached by the pre-crash housing bubble in New York. If you are among the many New York residents who are struggling to save their homes, a mortgage modification program could be the rescue package you are looking for.
What Is Mortgage Modification?
A mortgage modification, or loan modification, is a plan by which your lender works with you to make a number of changes to the terms of your mortgage, in order to make it more affordable. For example, the lender can reduce your interest rate, or allow you to change from a variable term to a fixed term rate. The lender could also extend the term of the loan, or even reduce the principal balance. Sometimes your monthly payment might be capped to a specific percentage of your household income.
A number of lending institutions have set up their own internal mortgage modification programs, which have their own criteria for eligibility. One of these is New York’s Bankruptcy Mortgage Modification Mediation Program, originally launched in Orlando and now being rolled out across the state. However, the majority of lending institutions have signed up to offer the Federal government’s Home Affordable Modification Program, or HAMP, which was set up by the Obama administration in 2009, and is regarded as the industry standard practice.
How Do You Get A Loan Modification?
In order to get a mortgage modification, you have to apply to your lender, by writing what is known as a hardship letter. This is not a begging letter, but has to set out exactly why you fit the criteria for a loan modification — that is, what circumstances caused you to get into difficulties with your mortgage. It is not enough to have got into arrears simply because of poor financial management — the reason needs to be something beyond your control, such as illness, divorce, loss of your employment, or failure of your business. The letter also needs to explain how a mortgage modification will enable you to get back on track.
Along with the hardship letter, you need to submit financial information, including two months’ bank statements, your last two years’ tax returns, a statement of your household income and outgoings, and account balances for your credit cards and other debts. You also need to provide confirmation of the information you gave in your hardship letter, and if you are applying for a HAMP, you will need to swear an affidavit. To get a loan modification from most lending institutions, you have to be two months behind in your repayments, but this is not required for a HAMP.
When you have got all this information together, you need to call your lender, and ask to be considered for a mortgage modification. They will assess your situation to determine whether you are eligible. It is also advisable to contact a non-profit counseling agency approved by HUD, or in New York you can also contact the New York Housing Finance Corporation, who will provide you with a list of recommended foreclosure avoidance counselors.
Mortgage Modification Or Short Sale?
You may be confused as to whether a mortgage modification or a short sale is the better option for helping you in your current difficulties. A short sale occurs when your home is bought for a sum that falls short of the total outstanding balance on your mortgage. The terms of the sale have to be agreed by all three parties — the seller, the buyer, and the lender — as obviously the lender will have to accept a reduction in the total repayment.
It might be tempting to go for a short sale if your house is seriously underwater — that is, if its value has fallen dramatically below the amount you owe. A short sale is certainly better than foreclosure — it will affect your credit, but not as seriously as foreclosure will. However, it is obviously not the answer if you want to stay in your home. Most advisors suggest that you apply for a mortgage modification first, and use a short sale as a last resort.
Mortgage modification can offer you a lifeline if you are threatened with the loss of your home. However, the process is complex, and it is not suitable for everyone. Take advice from an approved counseling service, to help you decide whether it is the best solution for your situation.