Many people are finding it difficult to explain why or how they came to be in a position of struggling to meet their mortgage payments, problem is if you are applying for a loan modification then this part of the requirement and you have to provide a reasonable and honest explanation for why you are struggling.

You will find a template for putting together a hardship letter in one of the previous posts on this site called Hardship letter template for a loan modification request.

For further information I have included a link at the top of the page to an article that explains what information you need to add to a hardship letter when explaining how you came to be in financial difficulty. The article is very well written and tells you exactly which questions you need to answer with respect to explaining your difficulties from a lenders perspective, which is of course the perspective you need to understand and satisfy.

This article is primarily concerned with the short sale process, but the questions asked will also satisfy the needs for a loan modification request, they are in effect the same reasons but for an alternative process.

So if you are struggling to explain and need a helping hand then please refer to this additional source of information.

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The first thing your loan servicer will do to see if you are eligible for the loan modification program is establish if the loan you have meets the terms for loan modification and if it does:

They will ask about your current income, what assets you have, if any, and any ongoing expenses. What they want to know is whether you will be able to make any new payments that will be due after loan modification by understanding your specific circumstances. Anything you tell them will eventually need to be supported by documented evidence i.e. tax returns, pay stubs etc.

They will also need to establish that your monthly first lien mortgage repayment does not exceed 31% of your gross monthly income.

If you get this far they will add past charges (any tax, interest, insurance and costs that your lender paid to 3rd parties on your behalf to the loan balance, effectively consolidating your debts into the mortgage balance. Note this does not include late fees, charges you have received as a result of being late on payments, these must be written off.

They will then calculate the interest rate required to bring your payments to a maximum of 31% of your gross monthly income.

Then there will be a value test to establish if the cost of the loan modification is less costly for the investor than the other option of not modifying the loan. The government’s incentive payment is also taken into account when applying the value test and people who have a lot of equity or whose incomes are very low compared to their home value are unlikely to pass this test.

Assuming you make it this far the next hurdle is to make the first 3 months of payments at the new repayment level. If you do this the loan modification is then made a permanent arrangement that will keep your repayments at a fixed rate for 5 years after which it will be capped at a  low rate for the life of the loan remaining.

You will of course have to sign the modification agreement and associated documentation attesting all information is true and accurate. Any false declarations will be a violation of Federal Law which is a serious offense so make sure you are upfront and truthful otherwise be prepared to suffer the consequences.