Many people do not understand what it takes to get qualified for a loan modification. The general rule of getting approved is that you must be able to afford it! What this means is that you should be able to show income and assets that will allow you to carry your mortgage with a low risk of re-defaulting. But, qualifying for loan modification is almost the same as qualifying for a traditional loan without pulling credit or getting an appraisal.
Lenders will qualify you for a loan modification if it makes sense. For example, if a lender has to reduce your mortgage rate to 1% in order to qualify you for a loan modification, you can forget getting approved. Here is a general rule of thumb to determine if you are wasting your time pursuing a loan modification:
Calculate ALL of your monthly expenses. If you pay your home insurance bi-annually, break this cost down on a monthly basis. Then calculate ALL of your income, to include interest, bonuses, commissions, etc. If you are positive or negative about $200, you have a good chance of getting a loan modification. If the lender is able to modify your loan so that you can save $700/mth then it is believed you would have a better chance of handling any financial setbacks and reduce the risk of you defaulting on your loan.
To better understand a homeowners chance of getting a loan modification, here are some truths to know:
1. It has been reported that candidates who received a loan modification defaulted again within 6 months
2. In order to get a loan modification approved, you need to have enough income to cover all of your monthly expenses. For example, if your current monthly expenses allow for $200 to savings, you may be able to qualify for a loan modification. The idea is that the loan modification would allow you to save more money and rebuild your financial status.
3. Proof of a stable job will also be counted towards qualification. The number of years you have worked consistently and what company you work for are taken into consideration. Also, having significant savings in a retirement account can help as well.
4. If you are not late on your mortgage, it will be harder to get a loan modification approved. Lenders may not state it, but being late is proof that you are having financial issues and are more willing to help when you are in this position. This is the same for short sales and is a reason why some homeowners have been advised to miss payments prior to requesting a loan modification.
5. Loan modifications can take anywhere from one to twelve months to complete, depending on your situation.
6. Many loan modifications that can be done quickly are changes in the mortgage terms to reduce the monthly payment, but this is usually for a short term 2-3 years. After this period, the rates will go up and so will the payments.
7. It is possible for some lenders to offer a loan modification of a new fixed rate over 30 years.
8. Attempting a reduction in rate and principal is generally more difficult to obtain. A lender would rather give you a lower rate for a longer period than reduce principal.
9. If you have multiple liens on your property, it is more important to get a loan modification on the loan with the higher balance.
10. Many loan modifications do not get approved. If you are at risk of being late, or are already late, start your loan modification immediately to allow time for you to pursue other options if needed, such as a Short Sale or Bankruptcy.