We’re halfway through already and I trust the information has been very useful to you so far. This is a fourth in a six part series on loan modifications written by Morgan Brown at Blown Mortgage. Please be aware that I can not help you with loan modifications. You should contact your loan servicer or a local mortgage company which specializes in loan modifications if you are seeking assistance. The Arizona Mortgage Team blog has information for those who are in the Phoenixa, AZ market.
Part 4 of 6
Tips for qualifying for a loan modification
So far we’ve discussed the basics as it relates to getting a loan modification. Now we’ll talk about a few tips that will help you qualify for a loan modification. These tips are centered around your hardship letter and the monthly expense worksheet.
The hardship letter
Called an LOE in the biz (letter of explanation) this letter is your explanation of why you believe you qualify for a home loan modification. Remember these facts when writing your hardship letter:
Banks want to work with people that:
- Are credit-worthy and have a good payment history
- Have been in their home for a long time
- That have been impacted by an unusual adverse event
- Have good potential to keep earning their current level of income
- Have good potential to pay back the mortgage
- Are likely not to go in to default after modification
Banks don’t want to work with people that:
- Have been chronically late in making mortgage payments
- Have lived in their home less than a year
- Are a poor credit risk
- Have lost their primary source of income
- Are likely to go in to default after modification
You want to write your hardship letter with these facts in mind. A good hardship letter includes:
- An explanation of the event that caused you to fall behind on your mortgage (or if you’re current why you’re requesting a modification). This should be positioned honestly as a one-time setback that is in the past.
- These can range from your adjustable rate mortgage resetting, to an illness now recovered, to a job loss that has been replaced by a new, stable and similar paying position. These are all one-time events that don’t impact your ability to pay a reduced amount moving forward.
- A statement of your desire to stay in the home and make paying the mortgage a priority.
- A statement of why your situation was temporary and one-time.
- A statement of why your situation is improving.
If you’d like a free hardship letter simply subscribe to Blown Mortgage’s Loan Modification Tips email list.
Be brief and to the point. We don’t need a novel, just a straightforward and accurate letter that states your willingness to stay in the home and the freak nature of the event that caused you to request a loan modification.
Monthly expense worksheet
Because your DTI is such a critical part of calculating whether you qualify or not, we want to be as high-level in our detail reporting to the bank. This means that we want to focus on big ticket items that we know will be consistent month-to-month and not the variable expenses that we can control through sacrifice and restraint.
Recommendations for your expense worksheet:
- Submit your own first. Let the lender ask for more detail. Your expense worksheet should include all items on your credit report and nothing else. Car, home, credit cards, student loans or second mortgages are the big ones.
- Variable expenses should be left off initially since it is impossible to predict the future and how your spending will change – it all comes down to the modification before you can accurately calculate that expense.
- If you are close to 50% call your credit card companies and ask for a reduction in your monthly payments. Even if you can save $40 per month on each card you could benefit with a lower DTI.
- Can you live without HBO? If you’re on the border look for ways to shave dollars off monthly expenses. While these won’t be in round one of our expense report it’s important to keep these in our back pocket for possible reductions.
- Double-check your expenses. Are you self-employed and pay for your car from your business? That doesn’t go on your expenses as it’s a business expense.
By preparing your own financial worksheet first you can save the time of filling out the lender’s which is often more detailed and time consuming and present your application quickly to the lender. If the processor accepts your application as is you’ve gained valuable time. If they request one of their own then you’ll have the information already collected. However; by preparing a detailed and accurate monthly expense worksheet that focuses on the items on your credit report and grouped in high-level buckets you’ll make it easy for the bank to see your financial snapshot and determine whether you’re a good candidate for modification.
With all the demand for modifications, making the bank’s life easy goes a long way. Remember these are just people swamped with work and in a demanding job where they have to say “no” a lot. Give them a reason to enjoy working on your file by being organized, efficient and together and you’ll get better treatment than someone who is difficult, disorganized and non-responsive. In the next post we’ll discuss negotiating your modification terms.