Loan Modification Process

 This page is dedicated to providing guidance on the preparations that an individual needs to prepare before applying for a loan modification.  Below we compiled information a bank/mortgage lender requires from the individual prior before accepting their applicaiton for a loan modification. 

  1. The borrower will have to the mortgage paperwork received upon the closing of your house.

                   Note: If you are unable to locate the closing papers you may contact your lender and request a copy.

The paperwork you will need is as follows:

  • Final Truth-In-Lending-Act (aka TILA) Statement
  • Mortgage Note
  • Mortgage or Deed of Trust
  • Certificate of Occupancy
  • HUD 1 settlement statement.

Please note we describe these items in the appendix.

2. Create a profit and loss statement (P&L Statement herein) from the past two to three years for you and your family.  The lender will review your profits and losses over the past two to three years to evaluate your current financial position.  It will help them determine if you qualify for a loan modification.  Below we provide examples on what the lender wants to obtain as supporting documentation for what you are claiming for your profits and losses.

a. Profit (Income) – When a company receives money for providing a good or performing a service it is called Revenue (Income). Therefore, an individual’s revenues (or the P in P&L) is the income earned from working.  As working provides the income for an indiviudal we can assume they can approximate or prove the amount of income they make each year.  A borrower’s ability to approximate/prove their annual income is important because a lender uses a borrowers income to evaluate if you would be able to remain in your home if you are approved for a loan modification.  An example of documentation that is acceptable as proof of income are check stubs and W2s. Below we have outlined criteria and items a provider would accept as proof of income.

 i. Consistent Job (longer than two to three years)-If you have maintained a job for a year or longer a borrower will except your last one to two months of pay stubs.

Note: Every person will have a different amount of pay stubs depending on your employer’s pay cycle (monthly, biweekly, or weekly).

 ii. Inconsistent Jobs (jobs less than a year)-If you have held multiple jobs in the past two to three years then a lender generally wants the borrower to provide them with two to three years of W-2s (Wage and Tax Statement) and tax returns.

Note: If you do not have your past W-2s you should be able to request a copy from prior employers as they are required to keep payroll records for a minimum of four years.

 iii. Provide four to twelve months of bank statements.

Note: If you throw away or shred your statements you may call or visit your local branch.  Another option is you can download your statements off the Internet.

iv. Provide recent statements for 401k, retirement, and investment accounts (This normally only applies to short sales, but it cannot harm you if you show the bank).

 b. Loss (Expense)- When a company makes a purchase for goods or services this is an expense (Loss).  An expense for an individual is when they purchase goods (i.e. home, food, insurance, etc.) or services (i.e. medical, cleaning, maintenance on a car, etc.). A mortgage provider would like to obtain evidence of your annual expenses.  It helps the lender/mortgage provider to determine if an individual is living within their means, if there is cash being spent for unique circumstances (i.e. medical bills, car accidents, schooling for kids with special needs, etc.), and if there is enough money remaining after all your expenses to pay the mortgage under the new terms.  An example of the evidence a lender would accept as proof of expenses are receipts and invoices. Below we have outlined the criteria and items a provider would accept as proof of expenses.

 i. A lender may want a borrower to provide the expenses from the past two to three years. If the borrower has not maintained records dating that far back then he/she should provide the expenses from the time you started falling behind on the house until present day. Include all bills paid and unpaid. Additionally, include a list of all outstanding debts. Examples of expenses are as follows: food, mortgage, clothes, schools, utilities, credit cards, medical bills, insurance, auto bills, etc.

 3. Hardship Letter – A letter developed by the borrower describing their personal situation of why they are unable to pay the loan (i.e. kids with disabilities, predatory lending practices, recently laid off, etc.). There are many examples of hardship letters on-line.

Note 1: Taxes-  When discussing an individual taxes a borrower may ask for your Tax Return.  For example they may say, ”Please provide me with your Fiscal Year (FY) 2008 taxes”.  Note a FY for an individual is from January 1 to December 31 (the same as calendar year).  Your FY tax return should include all your income and expenses for that year.  The reader should also realize that taxes for an individual are due on April 15th.  Therefore, in our example an individual’s FY 2008 taxes are due on April 15th 2009.

Note 2:  Some professionals have suggested keeping all bank statements, bills, invoices, etc. in addition to the envelope with the stamp.  This helps to prove the date and time the income or expense were sent/ received.

Move to Appendix

Profit -In business profit is anything derived by earning money. 

Loss-In business an expense is an outlay of cash/credit to obtain goods or services to create revenue generating activities.

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