When you get behind on your mortgage, one option available to you is a loan modification. This permanently alters one or more of the terms of your original mortgage to help you catch up. The good news is that most lenders are willing to consider loan modifications to avoid foreclosure. The bad news is that your application is not considered complete until the lender has everything they need.
Each mortgage lender will have specific information required for its loans, but there are eight documents which are standard across all mortgage providers.
The first thing you'll need to complete a loan modification is your mortgage lenders application. You can generally download these from the lender's website, or a representative of the company can email it to you. Either way, start with the application and fill it out completely. Some applications may list all of the required documents you'll need. If yours does, go ahead and gather those documents.
Next you'll need your last two most recent paystubs showing year-to-date earnings. Make sure the paystubs cover the last 30 days. If you're paid weekly, then you'll need your last four paystubs. Your lender will require them for everyone on the mortgage, so save yourself time and gather them at the start. If you're self-employed, create a year-to-date profit and loss statement for the business, as well.
Keep in mind mortgage lenders are particular about claimed income that doesn't come for a regular paying job with a paystub to prove it. You may have to jump through more hoops when you receive income from child support, government assistance, or side jobs that don't have regular paystubs. It doesn't mean your application will be denied, just be prepared to provide more documentation.
3. Signed IRS form 4506-T or 4506-EZ
This form allows your mortgage company to get a copy of your tax returns directly from the IRS. They will pull your full returns from the last two years filed, including all schedules, so it's also a good idea to pull them for yourself in case your lender has any questions. One of the biggest issues with this form is homeowners forgetting to sign it, so make sure you've filled it out completely and signed it before turning it in.
4. Two Most Recent Bank Statements
Your mortgage lender will dig through your finances with a fine-tooth comb to ensure you have a true financial hardship. In addition to your taxes, they're going to go through your personal finances. They'll expect your bank statements for all the accounts held by everyone on the mortgage loan. This includes joint and individual accounts, checking, savings, money market, and certificates of deposit.
5. Investment Statements
After your banking statements, your mortgage lender will want to look over your investment accounts, including stocks and bonds. Having investments doesn't necessarily mean you'll be denied a loan modification, but a lender requires proof of financial hardship. If you have money, but are mismanaging it, that could be grounds for denying the loan modification. In most cases, they do take into consideration the hefty tax penalties for withdrawing money from certain investment accounts before maturity.
Holding investments is a scenario that can sometimes be tricky for homeowner's to navigate, so if your lender raises any concerns about investment accounts you hold, the best thing to do is to seek the advice of an attorney. They can walk you through your rights and how to handle the situation diplomatically so you're still held in consideration for the loan modification.
6. Monthly Bills
You may have already guessed that your lender will want to look over your monthly bills, so go ahead and gather those. If you don't receive paper statements, print out a copy of the ones you receive electronically. Be sure to include all of your bills such as the household bills, credit cards, storage units, or anything else you pay out monthly.
7. Divorce Decree or Separation Agreement (if applicable)
If you've gone through a divorce or separation, you'll need a copy of the agreement. This is especially true if the other spouse is still on the mortgage and you can't gather the personal information required.
8. Hardship Letter
The hardship letter is a detailed explanation to the mortgage company of what caused you to fall behind on your payments. Lenders expect specific information, such as you lost your job six months ago but have since returned to work. In general, lenders want to know the event which caused the hardship has passed, and that making a loan modification will actually help get you back on track.
If you're unfamiliar with how to draft a hardship letter, it may be a good idea to seek the advice of an attorney or a HUD-approved counselor. In either case, having someone with experience help you write the letter can increase your chances of getting approved. Both attorneys and HUD-approved counselors know what mortgage lenders are looking for with these applications, and what the potential sink holes are to avoid.
These are the basic eight items you'll need to gather when applying for a loan modification. Keep in mind these are just basic documents, and your lender may require more in-depth documentation. That could include more tax returns or paystubs, or it could include something not on this list.
When you submit your application, be sure to keep an eye out for any additional information your lender needs. Although federal and some state laws prohibit mortgage lenders from filing for foreclosure once a completed application has been submitted for review, an application is not considered complete if the lender doesn't have everything they need. Follow up with their requests in a timely manner to avoid foreclosure while you're trying to get approved for a loan modification.