mortgage loan modification

Should You Cancel a Loan Modification?

Q: We started a home loan modification in june. We didn’t have to make payments for 3 months, then we paid our required 3 trial payments.

Now after many calls, faxes and paperwork requests, we have been told for 2 months that our loan is “in review.”

I’ve heard that others in our situation have received foreclosure notices or had their credit ruined. Should we cancel our modification before we get any deeper?

A: I would not recommend canceling your loan modification at this time. You have already complied with your bank’s multiple requests for income verification, documentation about your expenses, and other paperwork.

Additionally, you have successfully completed what is perhaps the most important part of the loan modification process – the three month “trial period” in which you show your bank that you can make on-time payments with a mutually-agreed upon, reduced monthly note.

The Impact on Your Credit Rating

I know you may be worried about the potential impact on your credit – especially if the bank rejects your application for a modification.

But the truth of the matter is that you’ve already been through a process where you did not make payments for three months (as the bank told you to do in order to qualify for a loan modification).

If your bank was going to report you as “late” to the credit bureaus, they’ve probably already done it. So halting your loan modification would not “undo” any potential damage to your credit rating.

You can and should check your credit files with Equifax, Experian and TransUnion to see whether or not your lender has reported you as having been late. If so, there’s really nothing you can do erase those credit blemishes.

If not, count your blessings and try to be patient amid what I know is a very trying, overly time-consuming process. Unfortunately, with more than 3 million foreclosure filings expected in 2010, banks (and the government) are overwhelmed by the sheer numbers of people currently seeking home loan modifications.

Why Foreclosure is a Not an Imminent Threat

You also need not worry unnecessarily about an unexpected foreclosure notice. Foreclosure proceedings don’t happen overnight.

And before banks begin the process of foreclosing on a home, they usually contact the homeowner many times demanding payment of what’s owed or what’s past due.

In your case, you seem to have had many, many contacts with your bank and no demands for immediate payment or payment in full.

So just keep doing what you have been to keep good records, document everything, and regularly check in with your bank for routine status updates on your application for a modified, reduced loan.

Even if the bank does surprise you with a nasty foreclosure notice (which doesn’t seem very likely), based on the other financial circumstances you described (namely, that you have recently began making your normal monthly payment), the fact that you have the financial ability to make your usual payment would help you to fend off a foreclosure proceeding and negotiate with the bank to stay in your home.

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