If you have fallen behind on mortgage payments and are having a hard time getting caught up, you may want to consider applying for a loan modification. One of the first steps is collecting the loan modification documents that are a part of your application.
What are the loan modification documents?
To apply for a loan modification, you will be required to submit a “complete loss mitigation package.” This is basically the lender’s application form plus all of the required financial documents that they require.
The loan modification document package consists of:
THE LOSS MITIGATION APPLICATION FORM: Most lenders have their own lender-specific loss mitigation forms so your first step is to ask your lender to send you a copy of their “loss mitigation packet” or “loan modification application form.” The lender will likely mail you a copy but if that’s taking too long, you can request that they email it, fax it or provide you a copy through your online portal. Most of the loss mitigation forms look similar to this general Uniform Borrower Assistance (UBA) form which was created by the government-backed investors like Fannie Mae and Freddie Mac. If your lender tells you that they don’t have their own loss mitigation application form, you can use this UBA form to apply for a loan modification.
THE 4506-C FORM: The lender uses the 4506-C form to request verification of the borrower’s tax returns (or lack thereof if you haven’t filed) from the IRS. (Watch this video to learn how to complete the 4506-C form.)
YOUR BANK STATEMENTS: These need to be your actual bank statements, not transaction histories. They must cover the most recent 60-day period of time for all accounts in the household (and all business accounts if the borrower is self-employed). These statements are usually multiple pages long and they may include a blank page at the end that must be included in order for the lender to deem the bank statements complete.
A HARDSHIP LETTER: The hardship letter explains the circumstances surrounding your financial hardship, why you defaulted, what you’re applying for and how the income in the household has recovered
PAY STUBS: These need to be pay stubs from the most recent 30-day period of a W2 job. They need to have your full name, gross and net income and year to date (YTD) earnings.
OTHER INCOME VERIFICATION: Examples of this would be rental income, disability income, SSI, retirement income, pension income, VA income, child support, alimony etc. If you’re receiving contributor income, make sure you include proof of the contributor’s income in order for it to be counted correctly as part of the household income.
MOST RECENT TWO YEARS OF FILED TAX RETURNS: Make sure the tax returns are signed and dated with a wet signature, not an electronic signature.
OTHER RELEVANT DOCUMENTS (Probate, Divorce, or Death Certificates): If you are recently divorced and your spouse is a borrower on the loan, you need to provide a divorce decree and a quit claim deed. If a borrower has passed away, you need to provide the lender the death certificate. If you are applying as a personal representative or executor on behalf of an estate, you may need to provide the probate documents showing the lender that you’re the correct party who should be handling the mortgage.
Why does your lender get to review your financials?
To be approved for a loan modification, you need to demonstrate to the lender that:
- Your financial hardship is over
- You are able to resume monthly mortgage payments
- Your income is stable and you make enough money to cover any future unforeseen expenses without defaulting on the mortgage again
Your lender gets to review your financials prior to receiving a loan modification to ensure that you are not at risk of defaulting again if you receive a modification. (Read more about the loss mitigation process.)
Understand what the lender is looking for in your loan modification documents
If it is an option for you to hire an attorney to help you apply for a loan modification, I recommend you do that.
If that is not an option, use the information below to help you understand how the mortgage lender is using the documents you’re submitting so you don’t get denied.
1. The lender wants to see a valid hardship
In order to be approved for a modification, you have to prove to the lender that the reason you fell behind on payments was due to a legitimate hardship (and not due to you being financially irresponsible).
There are five reasons considered by mortgage lenders to be valid financial hardships:
- Job Loss or Reduction of Income
- Divorce / Marital Separation
- Death of a Borrower
- Illness of a Borrower
- Unforeseen Expenses
When you write your hardship letter, make sure you explain your hardship in a way that fits into one (or multiple) of the above hardship reasons.
2. The lender wants to see stable income that will continue indefinitely
Lenders view modifications as “second chances” to become current and resume making stable payments. Lenders do not want to be in a position where they offer you a modification and then have to deal with another default shortly thereafter.
So, lenders look at the household income to determine whether the income has recovered enough to prevent future default.
If you appear to still be in an unstable income situation, the lender will be less inclined to offer you a modification.
3. The lender wants you to prove that resuming a mortgage payment is affordable for you
If you get approved for a loan modification, you will be resuming a mortgage payment that is similar to what you were making before the default.
While modified payments do drop on occasion, the drop does not usually exceed $400 per month, so the lender wants you to prove that you can afford resuming payments.
There are a lot of factors that go into this process but is good to have general familiarity with the below concepts:
Front-End Debt to Income Ratio: For purposes of loan modifications, your front-end ratio refers to the ratio between your mortgage payment and your total monthly household income. Different investors have different guidelines, but the general idea is that your mortgage payment should be no more than 30% – 33% of the household income.
This ratio allows for plenty of additional income each month to be used for other regular expenses or emergency expenses. If you can show the bank that your mortgage payment is about 30% of the household income, the lender will be inclined to believe that you can comfortably afford a modification and are not at risk of defaulting again.
Back-End Debt to Income Ratio: For purposes of loan modifications, the back-end ratio refers to the ratio between all household expenses (including a resumed mortgage payment) and the overall household income. The lender looks to ensure that you can afford to resume a regular mortgage payment AND afford all other normal expenses AND have some money left over each month should unforeseen expenses pop up.
The lender wants to avoid a situation where you are fully maxed out each month after paying the mortgage and the regular household expenses. If you show the lender a maxed out back-end ratio, the lender will not feel confident that the household can handle unforeseen expenses and you may get denied. You may be viewed as overextended and at risk for defaulting again.
Different investors have different guidelines but the general idea is that a back- end ratio should leave some room for unforeseen expenses, meaning – with all household expenses included, the borrower should still have income left at the end of the month to save for retirement, cover emergency unforeseen expenses, and live comfortably. Generally, a good back-end debt to income ratio is about 55% – 60%.
Review your documents to make sure you haven’t shown the lender a large surplus of income left over at the end of each month
Lenders always want to be paid back in the fastest time possible with the least amount of restructuring.
Part of the modification review process is to vet your income to see whether there is enough money coming in (and so few expenses going out) that you could handle a repayment plan instead of a modification.
Sometimes, repayment plans require a lump sum cash payment up front. Often, repayment plans have high payments, as they will always exceed the regular mortgage payment amount.
If you report high income and few expenses, you may accidentally create a large surplus between your expenses and your income. This may cause your lender to approve a repayment plan instead of a modification even if you asked for a modification.
Some lenders are required to offer repayment plans first if the income looks like it can support a repayment plan so the lesson is: part of applying for a modification is finding that sweet spot where a modified payment looks affordable for your household but not so affordable that you end up only being offered a very high repayment option.
Note: If you can afford a repayment plan and are offered one, it can be a good option to quickly get you caught up on your existing mortgage so a repayment plan isn’t necessarily a bad option. It’s only a bad option if it ends up being unaffordable.
Fill in the documents correctly prior to submission
One thing that can harm you during loan modification review is having incomplete or incorrect documents in your package. Make sure you fill in something on each line of the application, even if it’s just writing “n/a”
Use the PDF format for your documents, if possible: The best way to submit documents for a loan modification is to submit them as PDF files. Word documents often get jumbled after being faxed. PDF files retain their format. It is always better to type the hardship letter and to do as much as possible on the computer. Handwriting documents can create issues if the lender mistypes numbers or can’t read the handwriting.
Sign the documents with a wet signature: Many investors and lenders do not accept electronic signatures.
Avoid sending in duplicate or unnecessary documents: It’s important to submit only what’s being requested. Sometimes, homeowners send in many things that aren’t part of the structured package. Sending in additional documents can cause the document processors to have to sift through the package – thereby increasing the time it takes to get the review going and increasing the risk that the bank will miss a required document if it’s shoved between non-required items.
Use Letters of Explanations (LOEs) if a required document doesn’t exist: If you know that you do not have something that is part of the required document package, draft a letter explaining that the requested item does not exist. This usually applies to tax returns, bank statements, and pay stubs. For example, if you did not file a tax return for the most recent year, include a signed and dated letter stating that you did not file a tax return and thus cannot provide a return. Send these letters in with your initial package.
Once you’ve compiled and reviewed your document package, submit your document package to the bank to start the review process
- Write your name (as it appears on the mortgage), loan number and property address on every page of your package
- Put your documents in this order – send the documents all together (avoid faxing or emailing multiple times)
- Hardship Letter
- Income information
- Bank Statements
- Tax Returns
- 4506C Form
- Fax or email your document package directly to the loss mitigation department (you can ask the customer service representatives to give you the best fax number or email for your loan modification package)
Once you’ve submitted your documents, your goal is to get your file deemed complete by the bank’s document processing team
Most of the large servicers have front-end document processors whose job it is to “complete” the file.”
Once the file is complete, the document processors give the file to the actual underwriters (the decision makers).
The lender’s document processors typically do three things:
- Upload the Documents: The document processors receive your document package and they upload the documents to the lender’s system – meaning, they attach the specific documents to the specific slots in the lender’s computer system. For example, if 60-days bank statements are required, the document processor uploads the bank statements to the slot in the system that says “60-days bank statements” in the lender’s computer system.
- Review the Documents: They review the loan modification application and financial documents submitted to ensure that everything needed to complete the review has been received. The document processors are not reviewing the numbers or the content within the documents – they only determine whether or not a particular document has been received.
- Issue Missing Document Lists: If there are missing items needed to “complete the file,” they make a note to the account stating which documents are missing. Often, they draft a letter to send to you telling you what documents are missing. Some lenders then start calling you regularly to get you to send in the missing items.
Understand the most common mistakes made by banks during the document processing phase
The document processing phase is often where files have problems, typically for the following reasons:
- Mistakes by the Document Processor: The document processor uploads the documents to the wrong spot in the lender’s system.
- Repeated items marked “missing”: The document processor doesn’t understand that the “missing item” they’re requesting doesn’t exist. A common example of this mistake occurs when a borrower doesn’t have W2 income. In this situation, a borrower will submit verification of other kinds of income but the document processor will continue to request pay stubs because they view the item as “missing.” A file with this mistake will remain incomplete and not move forward.
- Delays in notification of missing items: You may not get notified within a reasonable amount of time that there are still documents missing. If the lender sends a letter listing the missing items, it sometimes takes a long time to get to you.
- Failure to call you with an update: Lenders are supposed to call you when there are missing items to speak with them about what is missing. Sometimes, the lender fails to do this.
- No notification of missing items at all: Some lenders just don’t notify borrowers that files are incomplete. Insead they put the burden on you to call in regularly to receive the list of missing items. If the borrower doesn’t call in, the file then gets closed and deemed an “incomplete file.”
There are some things borrowers can do to make sure their file does not get stuck at the document processing phase. Please see below:
Help yourself by doing everything you can to avoid issues during the document processing phase
1. The most important thing you can do at this stage is to call the lender regularly and ask informed questions.
After you submit document, call your lender regularly and ask informed questions about the file. Below are some questions that can help you know if your file is moving smoothly through the document collection phase:
- “Has my file been deemed complete?”
- “Are there any missing documents showing as needed?”
- “When was the last time my file was reviewed?”
- “Is the file with the underwriting department or is it with a document processor?”
- “Who is assigned to my file?”
- “What is the next step in the process?”
2. Make sure the loan modification documents don’t expire
For bank statements and pay stubs, your lender will always want the most recent 60-days of bank statements and the most recent 30-days of pay stubs.
You need to be tracking the expiration of these documents. Pay attention to when a new pay stub or bank statement is issued.
Send these updated documents as soon as they become available, without waiting for the bank to ask for them.
The document processors only review files every week or so (sometimes every two weeks) so if you’re not paying attention to the expiration deadlines and the documents expire, the file could stop moving.
A word about ‘streamlined’ modifications
Right now, due to the amount of homeowners transitioning off of a COVID-19 Forbearance plan, there are streamlined options available that do not require a document package.
If you are a homeowner who was placed on a COVID-19 Forbearance and you have a government-backed investor (Fannie Mae, Freddie Mac, FHA, VA, or USDA), you may not need to submit a document package in order to get a loan modification.
(I recommend that you download this Forbearance Mortgage Relief Guide)
If you are a Washington state homeowner about to apply for a loan modification or have questions about the loan modification documents, feel free to give me a call at (425) 654-1674.