« Loan Modification Marketing Training! | Home | Marketing Plan - Lifeline to Your Loan Modification Business »
Loan Modification Training - What is the loan modification process?
By admin | January 27, 2009
By now, many real estate professionals know what a loan modification is but there are many of you that still don’t know how it works. As loan modifications became the real estate buzzword of 2008, more and more people wanted to know actually how to acquire a loan modification either for their clients or for themselves. I would like to provide a little clarity on how a loan modification works and what to expect during the process.
There are many misconceptions concerning loan modifications and a lot of inexperienced people providing misinformation. The first thing any client should know is that they can try to modify their own loan. Loan modification processing companies are still considered a luxury. However, just as you can represent yourself in a court of law, if the trial is of a serious nature it is best to have a professional represent your interests. By utilizing a 3rd party you are accessing their expertise in loan modification and relying on their objectivity in what can be an emotional negotiation. But, how does a modification work and what are the steps?
A loan modification is a private negotiation between the client/borrower and the lender. Title and escrow are never involved. However, the steps are very similar to a refinance. First, you need to find out if a client qualifies for a loan modification. There is no such modification as a ’stated’ modification. The client is going to have to provide full financial details of their personal situation and, if self-employed, their business’ financials, as well. 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, whether financial, medical or personal, 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/client’s financial and prep to submit a loan modification package to the lender. With loan mods, there are no ’stated’ programs. Also, 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 on the file within 60 days. Included in the package: Mortgage statement, insurance declarations page, 30 days pay stubs, W2s, full tax returns, bank statements, other supporting financial documentation. Once again, there are no ’stated’ mods. Last but certainly not least is the hardship letter. This is the borrower’s one chance to address the lender and tell their side of the story. It is important for the client to pour out their heart so that whoever is reading it can feel the emotional pain to coincide with the hard facts that we are providing.
Once the package is received and uploaded into their internal system, it will go to initial review (Level 1). Level 1 is generally a front line employee in an underwriting department. They are looking for major red flags that would immediately disqualify the client for a modification. Low fixed rates or substantial monthly surplus/deficit are two of the reasons who disqualification. If you are using a quality processing company, you should never have a modification denied at this stage. Most companies would catch a major red flag prior to submission. Generally, those who don’t know what they are doing get a level 1 denial. Ultimately it is a waste of everyone’s time, most importantly the borrower.
After Level 1 review the file moves to Level 2. Level 2 is generally someone who has the authority to sign-off on a modification. This is sometimes a management or supervisor level position. The level 2 reviewer is now ‘underwriting’ the file. They are going over financials and supporting documentation 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.
Finally, the negotiations. When the level 2 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 before an offer will come. The negotiation is the third level and the end of the process. Many negotiators will take the review from level two 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.
When the negotiator decides on the offer, the offer will be sent directly to the client. It is a very exciting time for the client but 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 a new offer. However, most times the client is very please with the offer and decide to sign and return. This may also be because the offer is based off their particular financial situation and is built to fit their budget. Once the offer is signed and return, the modification is complete.
However, there are instances that the borrower is not happy with the terms. Most companies will try to renegotiate but this will drag out the process and/or make the first offer null and void. Most times, the offer is the ‘first and final’ offer.
These are the basic steps of how a modification works. There are, of course, many different ways to approach a modification. Some believe in the litigation route and others believe in the hardship route. Both have their pluses and minuses. In the end, both will have to provide a compelling argument and a full and complete package to procure a modification for their clients.
More Loan Modification Training coming soon!
Topics: Uncategorized |
Comments are closed.