How To Get A Mortgage Loan Modification: In Search For Lower Rates

SF Victorian Rate ModificationYou know what’s better than successfully refinancing your mortgage at a lower rate? Getting a free loan modification at a lower rate without all the paperwork, hassle and fees. A loan modification is when the bank contacts you and basically says, “Hey good looking! Do you want some free money? If so, you’re in luck!

My loan modification opportunity came out of the blue right around Christmas time. Bank of America sent me a FedEX envelope with a single sheet of paper that read, “This offer is exclusively available to you through Bank of America, for a limited time only.” I honestly thought the letter was junk mail until I looked a little closer to see all my account details included.

For the past two years, I’ve been pinging Bank of America to see if they would lower my vacation property mortgage from what’s now considered a sky high 5.875% 30-year fixed rate to something lower. I’ve refinanced my other mortgages multiple times, but this was the stubborn one. The condotel mortgage secondary market dried up after the crisis, therefore refinancing at a lower rate became impossible. We should all refinance as many times as it takes to save money.

If you are not aware, most banks sell their loans to the secondary market (mortgage backed securities) as a way to hedge out risk and capitalize on profits. The secondary mortgage market actually helps the end consumer by allowing banks to lend more at lower rates. Unfortunately, once a bank run comes, it takes a while for the secondary market to thaw.

Since Bank of America wasn’t able to sell my loan in the secondary market, they figured why do anything to lower my rate given that’s what we agreed upon. I hadn’t missed a payment, so as far as they were concerned I was a good customer. BoA had the capability to lower my rate, but they didn’t have the willingness. Fair enough.

So how did I successfully manage to reduce my 30-year fixed mortgage from 5.875% down to 4.25% for free and within two weeks to boot? What’s more, this is my second free loan modification. The first one happened five years ago with Citibank when they decided to lower my then 5/1 ARM 3.625% rate down to 3.125%. Let me explain how to win the mortgage lottery.

HOW TO GET A LOAN MODIFICATION

1) Pay your mortgage on time. The big banks have different types of rate/loan modification programs. One constant criteria I’ve found for getting a rate mod is the borrower’s stellar repayment history. Once you show a record of consistent payment, banks will be more inclined to offer you concessions. Citibank decided to knock 0.5% off my rate back in 2007 just because I was a good client. Now Bank of America decided to cut a whopping 1.625%  off my vacation property mortgage partly because I never missed a payment. If I showed a history of being late, I’m pretty certain neither bank would have given me a rate mod.

For about a year, I was thinking of just not paying in protest of Bank of America’s inability to lower my rate. After all, California is one of many non-recourse states who do not go after your other assets if you welch on your mortgage obligation. Given my vacation property provides a healthy amount of income and the fact that I cherish my credit score, I decided to keep on paying. Under my breathe, I was envious of everyone who got free bailouts for not paying their debt.

2) Gather your financial information. You need to have your financial ducks in order to show that you are financially responsible. Below are six things Bank of America asked me to provide for their underwriter to review. In order to make sure the process goes as smoothly as possible, don’t forget to sign and date all documents. Furthermore, make digital copies of your records so that you can e-mail them over to your loan mod processor. One of the most common excuses banks have had for delaying any type of loan mod or refinance is losing your documents. It sounds ridiculous, but it’s true.

1) 4506T form signed and dated.

2) 2011 tax return including all pages. Second page of your tax return must be signed and dated.

3) Last two consecutive current paystubs. Must reflect year to date earnings.

4) If self-employed, have S Corp or Partnership send profit and loss statement for the fiscal year. Profit and loss statement must be signed, dated and include company’s name.

5) K1. ( if applicable)

6) If you own any other properties and second mortgages please fill out REO attachment as well. Make sure to include every property, even if properties were paid off.

Note: I suggest NOT providing more financial information than is required. It will only complicate things. Only if they ask for more assets or more income to get you under a certain debt to income ratio should you send more information. In my case, Bank of America wanted to make sure my debt to income ratio was under 42%. 42% is an easy hurdle to overcome.

3) Get confirmation of receipt. Once you have sent all the requested documents, follow up with an e-mail and phone call to make sure the processor received all your paperwork. You are almost always running on a deadline. Your processor is only the intermediary between you and the bank’s mortgage underwriting. It’s the underwriter who goes through all your financials to make a feasibility study as to whether you qualify. Therefore, help your processor help you by making sure they have everything they need to prevent delay.

4) Sign the new agreement. After getting a phone call or e-mail saying your rate modification is approved, you should then expect new loan documents in the mail. Once you receive the loan documents, you should receive another e-mail or phone call from a notary who will witness your signing of the new agreement. If you do not hear from your notary within two days of receiving your document, call/email your processor to get them to press.

5) Change your mortgage payment amount. Goodbye old mortgage payment and hello lower mortgage payment! Make sure you change your autopay/transfer amount to reflect the new mortgage amount. The mortgage account number should be the same, but double check anyway. Remember, mortgage interest is paid in arrears. In other words, your May 1 mortgage payment is paying for April interest.

HOW TO PROACTIVELY GET A LOAN MODIFICATION

In April of 2012, a federal judge approved the $26 billion settlement deal reached between the nation’s five largest mortgage lenders and the attorneys general of 49 states and the District of Columbia over foreclosure processing abuses. Bank of America also announced on January 7, 2013 they agreed to a $11.7 billion to resolve disputes with Fannie Mae. If your mortgage is with Bank of America, JP Morgan Chase, Wells Fargo, SunTrust, U.S. Bank, PNC, MetLife Bank or Ally Bank, you could be in luck!

The approval clears the way for the banks to compensate homeowners who may have been impacted by the so-called robo-signing scandal, in which bank employees signed hundreds of documents a day attesting to facts that they had little or no knowledge of. Furthermore, part of the settlement should go towards those who have been wrongfully foreclosed. $17 of the $26 billion settlement is to go towards loan modifications. Such modifications include principal reductions of as much as $100,000 for roughly one million homeowners who are underwater or behind on their payments! Another $3 billion or more will go toward refinancing mortgages for borrowers who are current on their payments. The other $5-6 billion is for fines.

Is it a coincidence that Bank of America was highlighted in the press last summer as the slowest bank of those who settled in terms of providing rate modifications for its clients? Probably not. The US Department Of Justice is forcing Bank of America to hurry up and help their mortgage clients or else face more fines. This is why we need to pay attention to the news. I wasn’t proactive in calling BoA because I was lazy, didn’t put two-and-two together, and also felt like there was no hope. Well there is hope.

Proactive Steps To Take For A Loan Mod

1) Call your bank’s mortgage / loan modification department. It doesn’t matter if your bank is one of main four banks which settled in the $26 billion dollar suit. No big bank is safe from the government. Find out what type of rate or loan modification programs they have for you. Hopefully you’ve been a reliable borrower.

2) Ask your bank whether they still own your loan. If your bank does not own your loan, they cannot modify your loan unfortunately. It’s like me inviting my friends over to stay at your house. Not going to fly.

3) Inform the loan mod department of hardship. A lot of people have lost their jobs, seen a pay cut, or seen their spouse’s pay get cut over the past five years. If your bank owns your loan, they would much rather have you continue to pay a lower payment rather than no payment. Since interest rates have come down, your higher-than-market mortgage is providing outsized returns as the spread between the bank’s borrowing cost has widened. Even if the bank lowers your rate, they are probably still making the same, if not higher spread than when they first made the loan, so don’t think your bank is losing money. They just aren’t making as much money off you.

4) Assemble your financial documents. Besides your last two pay stubs, latest W2, K-1s, company financials, and investment assets, you should have a detailed budget of all income an expenses as well just in case they ask. Your goal is to demonstrate your ability to pay, and also show your debt load is manageable as a percent of income. If you’ve shown your ability to pay on time your higher mortgage payment, you should certainly be able to continue to pay on time a lower payment.

5) Be relentless. The federal government is seeing the fruits of its crackdown efforts with the latest $26 billion dollar settlement. No bank is safe, especially the big banks. As a result, I encourage you to be relentless in calling the loan modification department at least once a quarter to see if they have any new programs. If the bank owns your mortgage, they have the ability to lower your rate. If they do not own your mortgage, you may still be eligible for some type of decrease if the alternative is non-payment.

BEING RESPONSIBLE SOMETIMES PAYS OFF

For years, I’ve wondered when I was going to get me some bail out money. After all, I payed plenty of taxes without seeing much return. Just when I thought our system was broken with so much moral hazard, in came the US Department Of Justice. At last, relief is slowly trickling down to those who were responsible for meeting their debt obligations.

My anecdotal example makes me bullish about the housing sector over the next several years. As the housing sector recovers, so does the economy and the labor market. The money I save gets partially pumped back into the economy through discretionary spending. I’ve been a cynic towards the mortgage industry and the US Government’s effectiveness in helping the people until now. Things are improving. It’s just taking a darn long time.

Good luck everyone! If you can’t get a loan mod, the next best thing is to check the latest mortgage rates and refinance. The 10-year yield has ticked up from around 1.8% at the end of 2012 to currently 2%. I don’t expect rates to move much higher, but if there is a rush to refinance banks may become even more stringent and raise rates even further given an overflow of demand. One thing to note is that if I was able to refinance my BoA mortgage, I’d probably be able to get the rate down to 3.75% instead of 4.25%. But hey, something is better than nothing!

Recommendation:

Check Your Credit Score: Take a moment to check your free credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! It’s important to know your credit score so you can present yourself the best possible way when it comes to a loan modification.

Updated: 2Q2014

Regards,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

    • says

      I’m sure each bank has different requirements. However, based off my own experience with geting two loan modifications out of the blue, I think the number one requirement is being a good customer who pays on time. Afterward, it’s how the bank evaluates your asset growth and your potential to do more business. Finally, it’s the US Department Of Justice suing the crap out of banks like BoA to help provide mortgage relief.

  1. says

    I would love to refinance or modify my loan! Unfortunately, my balance is too small (less than $60K). It is a good thing I only have less than 5 years left and the interest rate is 5%. My net interest rate is actually lower since I am making additional principal payments. That was my only option.

  2. Ivy says

    As it happens, I called yesterday my mortgage company (ex-ING Direct, now Capital 360) for a loan modification. I knew they had this program from when we refinanced a year ago. I thought the applicable percent would be the one seen on their website – 2.5%, which is lower than our current 2.75%. However, I was told that the lowest modification offer is for 2.875%, so obviously didn’t make sense. Oh well, at least I checked

    Didn’t BoA charge you for the modification any fee at all? The ING fee is one monthly payment.

    • says

      No out of pocket fees at all. That said, I’m sure it’s all baked into my new rate. If I was able to refinance this loan, the rate would be closer to 3.5-3.75% for a 30 year fixed. This mortgage is a different classification than normal.

    • says

      I hear ya. When I talked to BoA, I was incredulous until the very last minute b/c this is a vacation property/rental, I know how banks are notorious about not giving slack to vacay property owners.

      But, their one and only requirement was simply that I own the property and have visited it/used it in the past year. Guess there are a lot of abandoned properties out there!

    • says

      The estate, successor, life insurance, or the property is sold. After 20-30 years, you should have lots of equity to pass off to whomever you name as a successor.

      What’s scarier is renting for 20-30 years and having nothing to show for or pass down.

  3. says

    “Paying your mortgage on time” — yes! My wife and I simply refinanced not too long ago, so now quite what yo’ure talking about, but still….and we’re pretty happy, and one thing that helped and made the bank more interested in working with us was that we always pay on time. Always. I think that’s sound advice for any loan or anythign! Always pay on time and you won’t screw yourself over in the future.

    • says

      For years, I was really wondering whether I was stupid to continue paying my mortgage on time at 5.875% with all the bailout money being handed around to those who stopped paying. But, I reminded myself I bought the vacay property for the long term, to enjoy with family. I could afford the payments, so I didn’t want to cut off my nose.

      I’m REALLY glad banks are now rewarding responsible homeowners who payed on time through thick and thin. We’ve gone too far the other way.

  4. says

    That’s great news you were able to get a loan mod! I didn’t really understand how they worked before. It’s weird that banks sell their loans to the secondary market but hey if it gets lower rates for us that’s ol with me! I actually had to explain how that workd to my mother recently as she wasn’t aware and was getting all upset at her banker for no reason when shr got a notice in the mail.

    • says

      Thanks. Yes, it kinda feels like winning a $150K lottery. All the sweeter as it’s from a bank.

      Without the secondary mortgage market, banks can’t leverage as much because their capital is tied up in the mortgage paying monthly payments. With more capital comes more loans, which means more supply and lower rates. Of course, if banks don’t have proper underwriting standards and lend out to anybody who breathes, 2009-2010 happens.

  5. says

    Do you know if and how the loan mod has affected your credit score/report? I have read of stories (with Chase) where the reduced payments were being reported as partial payments to the credit bureaus. That could be very damaging to your credit score.

    • says

      Great question. With my two loan modifications, they specifically stated there is no negative affect to my credit score.

      A rate loan modification is a voluntary act by a bank to reduce interest costs and therefore payments. If the loan modification has to do with a reduction of principal e.g. principal forgiveness, there may be credit consequences. But, this is easy found out by the mortgage debtor asking the bank whether the loan mod will affect their credit score.

  6. jb says

    And what if you are under water? I have a stellar payment history, Ive done the “right” thing for eight years now. Day in Day Out. But have been turned down for every loan mod/refi I can find, unless of course I decide NOT to pay for 6 months. I do have a CAL HFA loan at 4.5%, but I have a 2nd and 3rd @ 5% and a clause in my loan that says I can not rent till the 2nd and 3rd are paid off, which are not being paid off till the first is. I want to tidy up this loan and have the ability to rent till the market rebalances in my area. But it seems that I am in the middle and there exists nothing for me.

    Also how do appraisals work in CA. Are they based only on comps? Or are they subjective? Where i find the right appraiser and he/she sees what I see in my house and I am not under SO MUCH water, maybe even above. – thank you.

  7. Mr. B says

    Dumb question… are there closing fees (by bank or government) as there would be with a re-fi? I haven’t pursued a re-fi b/c my interest is low-ish at 4% on my 5/1 ARM. And I’m 3 yrs in. It would take me 2-3 yrs to recoup a re-fi anyhow. Thoughts?

    • says

      There was no closing costs for my latest loan mod. Loan mod closing costs are usually negligee to nothing. It’s literally the bank rewarding customers for being good customers or banks forced to modify due to some lawsuit like the one I describe in this article.

      4% on a 5/1 ARM is high as conforming ones around around 2.625% now or so. I’d refi if you can breakeven within 2 years.

      • Mr. B says

        Hmm… I will look into it. I’ll try to get a mod first, then possibly pursue a re-fi at another 5/1 ARM… don’t plan on being in this home for more than 5 years.

  8. says

    I think I received something like this recently, but it looked like junk mail and I may have tossed it. I’d love the chance to get it lower than 5%. Guess who’s calling their bank tomorrow.

    • says

      BoA told me the reason why they sent the loan mod letter notifications through FedEX is because many people thought their letters were junk mail. A lot of people who have tried to get a loan mod are tired of the runarounds.

      Good luck! I thought my letter was junk mail too!

  9. Kelly says

    Samurai- I’m currently going thru this same loan mod process and got an offer out of the blue which I thought was a joke. Lucky for me it wasn’t , but I am wondering why the interest rte offer is only 4.25% as opposed to something in the 3s? of course our loan rate was above 6% but our place is underwater in value and the modification doesn’t address principle write off. We pay on time every month and have it set as a rental property at this point w/tenants but should we look into any other programs or are any available ?

  10. Kelly says

    Yeah we will be asking, lol. What about the HAMP program? What does that do or do you know if we would qualify since we rent it out now? I’m new to all this cant ya tell;)

  11. says

    Here’s my scenario. Bank of America just told me last week that my home loan, which is about $311,000.00, does not qualify for a rate modification because the investors are unwilling to participate. In order to do a traditional refinance, I’d have to kick in $70,000 to bring the loan to value ratio to 80%. The current 30-year loan was established in 2005, and the rate is 5.875%. Given that the home is upside down, would you recommend refinancing, and putting another $70k into the home, just to lower the rate to around 4%?

    • says

      Hmmm, which “investors” are these? Ask if BoA own your mortgage or not. Because it is confirming, it probably is already sold off to these “investors” but you need to ask for clarification.

      Take your interest savings of your new rate, divided by $70,000 to calculate your rate of return on your cash in. Then ask yourself whether you will be living in your house for the next 5-10 years, and ask what other investments are out there and then decide.

  12. says

    Can you provide a clarification? When you say “interest savings”, do you mean the total dollar difference saved on interest payments between the existing loan and the new loan?

    • says

      Correct.

      You pay $1,000 interest at 5.75% and now pay $800 with the new rate to get $200 a month. Take $2,400 for the year and divide by your capital infusion to get the rate of return.

  13. Desi says

    You write that banks will not modify a loan if they don’t own it. I have read and been told by attorneys that a deal can be made with the investor of the loan and if it makes financial sense for them. What’s the truth, and if it can’t be done why are there law firms that say they can do it?

  14. Moshennik says

    I have an investment property loan with everhome bank. It used to be a 5 year ARM @ 5%, but upon reset the interest is now 2.25%. I requested a load mod several time before (last time 2-3 years ago), and was willing to pay 3% interest if they fixed my rate, but they refused. Basically, they claimed that modification is only for those who are unable to make payments. They offered to refinance, but that would mean paying all the costs again..

  15. Dan says

    I am just trying to get a lower rate. I am currently 5% apr 30 yr fixed, Bank of America. Credit score is 700 plus, never missed a payment in my life, including a BoA credit card in perfect standing for 10 plus yrs. I am not having financial hardship, my rate is just too high. According to BoA website, I don’t qualify for a modification because I still have my job and am current on payments… I guess it doesn’t hurt to try anyways.

  16. tracy says

    I am trying to modify my loan with BOA. This is the second time application. I have been working with them since May 1st. Last year I was declined. I am a single mother and have always paid my mortgage on time. I am currently suffering from hardship due to a loss of a very large client, my daughter last year was murdered, my other daughter had a brain tumor and has severe long term health issues as well as learning disability. My son had leukemia for six years and has also long term complications. BOA keep giving me the run around. I am grieving and have been severally for the last year and a half. My rate is 6%. I have equity in my home. I have also credit card debt. I feel like just stopping to pay on anything. I am overwhelmed and need extreme help. BOA is driving me literally crazy. One week they say they need my bank statements. I faxed them. The next week they say they need the originals instead of them being printed off the internet. I faxed them. The next week they said they need my loan number on each bank statement page. I faxed them. Now they are saying I need to open a personal checking account. One ridiculous thing after another. I told them I am going to write a letter to the DOJ and our Attorney General. I will literally send it every day. Should I stop paying my loan and show them I mean business? I need help. Thank you.

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