How to Negotiate Mortgage Modification

As a homeowner, the events that may lead up to your foreclosure and eviction are financially and emotionally devastating. You may fall behind on your bills and be at risk for foreclosure due to job loss, hospitalization, or divorce. For relief, you may attempt to negotiate a mortgage modification through your lender. A mortgage modification is a permanent change in your home loan that should result in an affordable monthly payment. To best navigate the mortgage modification negotiations, you must first become familiar with how the foreclosure process works.

Mortgage Default

You full mortgage payment generally comes due on the first of the month. The lender will also attach one 15-day grace period to the payment due date. Late fees will be tacked onto your account, if the lender has not received your full mortgage payment by the time the grace period expires. After 30 days of missed payments, the mortgage falls into default and the foreclosure process begins. Be advised that your mortgage must actually be in default, before you can negotiating a mortgage modification through the bank.

Pre-Foreclosure Stage

In pre-foreclosure, your mortgage has fallen into default, but your home has yet to be foreclosed upon and auctioned off. The pre-foreclosure stage often lasts for a total of 150 days. During pre-foreclosure, you will receive a notice of default and demand letter in the mail, which both order you to immediately bring the mortgage back current. Over the telephone, lender representatives will contact you and seek an explanation for the missed payments. At this point, you may broach the possibility of a mortgage modification to save your home.

Mortgage Modification Package

For affordability, you should look to secure a mortgage modification that results in a monthly payment that is less than 30 percent of your monthly gross income. Before approving of any mortgage modification, your lender must verify that you have exhausted almost all financial resources available to meet the current mortgage terms. When negotiating the mortgage modification, you will therefore put together a package of recent tax returns, pay stubs, and banking statements to document your financial history. In terms of investments, you should have already liquidated your taxable portfolio to raise cash for making mortgage payments, prior to negotiating the modification. You should also eliminate discretionary spending from your budget well before the negotiations. The bank will be likely to reject your mortgage modification proposal, if it discovers that you have been taking tropical vacations quarterly.

Pre-Foreclosure Sale

Be advised that the bank operates with the best financial interests of its shareholders in mind, and is not obligated to approve of any mortgage modification. For improved options, you should also consider selling the home in pre-foreclosure. To expedite the process and attract demand, you should offer the home at a 10 percent discount to comparable real estate. A prospective buyer is likely to drive a hard bargain, if the home is in need of minor repairs because you lacked the funds for general upkeep. The situation would be further complicated if your mortgage is underwater and you owe more on the home than it is actually worth. You would then be forced into a short sale, where the bank must agree to accept less cash on the home than its outstanding mortgage balance due.

Foreclosure and Eviction

The lender will publish a notice of sale in the local newspaper, after 180 days of missed mortgage payments without any settlement. The notice of sale announces a time, date, and location for your home to be auctioned off. The foreclosure auction date usually falls within 30 days of the notice of sale. The bank will repossess the property as real estate owned, if a buyer does not emerge with a winning bid at the auction. Immediately after the auction, the bank or the home's new private owner will file a 30-day notice to quit and eviction lawsuit to have you removed from the premises.

How to Negotiate Mortgage Modification, Sources:

U.S. Department of Housing and Urban Development: Loan Modification Frequently Asked Questions

RealtyTrac: Property Foreclosure Overview and Foreclosure Process

CNNMoney.com: The 3 stages of foreclosures

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