A loan modification is a negotiation between the borrower and the lender.  Title and escrow are never involved, however the steps are similar to a refinance.  First, you need to find out if a client qualifies for a loan modification.   The client is going to have to provide full financial details of their personal situation and, if self-employed, their business income books.   When selling a loan modification you should be looking for someone who not only has a ‘bad’ loan but is also in a bad situation.  Just because a client has a rate above 7% does not necessarily make them a great candidate of a modification. However, if the same client has a loss of income, medical hardship or their rate is adjusting to 10% in a month then they become an excellent candidate.  The hardship is the difference between a qualified modification candidate and someone who is just unhappy with their loan.  Once we identify a good candidate for a loan modification, we first gather the borrower’s financials and submit a loan modification package to the lender.  With loan mods, there are no ‘stated’ income.  Instead of using a debt-to-income ratio coming in traditional financing, we use a personal profit & loss statement to show both the financial hardship and to have the lender see that if they were to modify the loan that it would take the client from a poor situation to one they can better handle.

The first document sent to the lender is the authorization form. This form notifies the lender that we are working on behalf of the client.  After the authorization is acknowledge, we are ready to submit our package. Each and every package that an attorney-backed company sends will be accompanied with a demand letter. This letter is demanding action within 60 days.  Included in the package: Mortgage statement, insurance declarations, pay stubs, W2s, tax returns, bank statements, other supporting financial documentation and then the hardship letter.  This is the borrower’s one chance to address the lender and tell their side of the story.

Once the package is received and uploaded into their internal system, it will go to initial review.  This is generally a front line employee from underwriting who is looking for any red flags that would disqualify the client.  Low fixed rates or a substantial monthly deficit (or surplus) are two of the reasons for quick disqualification.   Generally, if you are working with a loan modification company they will attempt to pre-qualify you to prevent you from being denied.

After initial review the file moves to the next stage.   This stage involves someone who has the authority to approve the modification.  This is sometimes a management or supervisor level position. This person is now ‘underwriting’ the file.  They are going over the financial docs to ensure that they match up with the borrower’s and processing company’s statements. Often, they will come back to the processing company asking for clarification or additional information.  This step is the longest of all the steps as the lender wants to ensure that if they give a modification to the borrower that the borrower will in fact be able to handle the new terms and that the lender is not giving up too much ground on the modification. After the review process is over, it is time to be assigned to a negotiator.  If the company you are using to assist with your loan modification has web based loan modification software they will most likely give you the ability to track the progress of your case online.

The last step is negotiation.  When the reviewer assigns the file to a negotiator, the client has in fact been approved for a modification. Now, we are to find out the terms to be set. Once it is with a negotiator it can take some time for the offer to arrive.   The negotiation is the end of the process. Many negotiators will take the review and crunch the numbers to find a reasonable solution that protects the lender but also helps the borrower. If there is an investor on the loan, the negotiator will also go to the investor for a sign off on final terms so that an offer can be made.

The offer will be sent directly to the client and the processing company needs to review the offer to make sure it makes sense for all parties. It is possible to go back and re-negotiate at this point, however, most times the client is very pleased with the offer and will decide to sign and return the form.  Once the offer is signed and return, the modification is complete.

However, if the borrower is not happy with the terms most companies will try to renegotiate but this will drag out the process.  It will also void the the original offer  null and void so choose wisely.   Many times the first offer is the only offer.

These are the basic steps of how a loan modification works. There are other different ways to approach a modification but this is just a sample.