Loan Modification Frequently Asked Questions

A Loan Modification is a permanent change in one or more of the terms of a Borrower’s loan, allows the loan to be reinstated, and results in a payment the Borrower can afford.

Question 1: In utilizing the Loan Modification Option to bring an asset current, can the Lender include all fees and corporate advances?

Answer: Mortgagee Letter 2008-21 states in part: Legal fees and related foreclosure costs for work actually completed and applicable to the current default episode may be capitalized into the modified Principal Balance.

Question 2: May a Lender perform an interior inspection of the property if they have concerns about property condition?

Answer: Yes, per Mortgagee Letter 2000-05, page 20, the Lender may conduct any review it deems necessary to verify that the property has no physical conditions which adversely impact the Borrower’s continued ability to support the modified mortgage payment.

Question 3: Can a Lender include late charges in the Loan Modification?

Answer: Mortgagee Letter 2008-21 states that the goal in providing the Borrower a Loan Modification is to bring the delinquent mortgage current and give the Borrower a new start; therefore, the Lender should waive all accrued late fees.

Question 4: When utilizing a Loan Modification Option, can a Lender capitalize an escrow advance for Homeowner’s Association fees?

Answer: HUD Handbook 4330.1 REV-5 (Paragraph 2-1, Section B, Escrow Obligations) states: Lenders must also escrow funds for those items which, if not paid, would create liens on the property positioned ahead of the FHA-insured mortgage.

Question 5: Is there a new basis interest rate which Lenders may assess when completing a Loan Modification?

Answer: Yes, Mortgagee Letter 2009-35 states that the Lender shall reduce the Loan Modification note rate to the Current Market Rate. Please refer to Mortgagee Letter 2009-35 for more details.

Question 6: Are Lenders required to re-amortize the total amount due over 360 month period?

Answer: Yes, per Mortgagee Letter 2009-35, the Lender must re-amortize the total unpaid amount due over a 360 month period from the due date of the first installment required under the Modified Mortgage.

Question 7: What date is utilized when determining the correct interest rate for a Loan Modification?

Answer: The date the Lender approves the Loan Modification (all verification completed and servicing notes documented, reported to SFDMS) is the date that Lenders are to use in determining the interest rate.

Question 8: Will HUD subordinate a Partial Claim should a Borrower subsequently default and qualify for a Loan Modification?

Answer: If a Borrower subsequently defaults and qualifies for a Loan Modification, HUD will subordinate the Partial Claim.

Question 9: Are Lenders required to perform an escrow analysis when completing a Loan Modification?

Answer: Yes, Lenders are to perform a retroactive escrow analysis at the time the Loan Modification to ensure that the delinquent payments being capitalized reflect the actual escrow requirements required for those months capitalized.

Question 10: Can a Lender qualify an asset for the Loan Modification Option when the Borrower is unemployed, the spouse is employed, but the spouse name is not on the mortgage?

Answer: Based upon this scenario, the Lender should conduct a financial review of the household income and expenses to determine if surplus income is sufficient to meet the new Modified Mortgage Payment, but insufficient to pay back the arrearage. Once this process has been completed the Lender should then consult with their legal counsel to determine if the asset is eligible for a Loan Modification since the spouse is not on the original mortgage.

If you are thinking of buying or selling a home, condo or investment property call me Mark Spector 310-430-0633