Foreclosure Strategies For Homeowners

Part I: Loan Modification

Bad things happen to good people. I've met many good, hard-working people that have ended up in foreclosure. They are often embarrassed, anxious, and upset about their circumstances. There are strategies, however, to resolve the foreclosure in a positive way and people to help you accomplish that goal. One common strategy for avoiding foreclosure is a loan modification.

In an application for a loan modification, you must prove you can afford the mortgage and prove you suffered a financial hardship. Your modification application should consist of the following documents, in the following order:

1. Application form (often called a Request for Mortgage Assistance)
2. IRS Form 4506T
3. Hardship letter
4. Proof of hardship
5. Proof of income
6. Bank statements
7. Tax returns
8. Letter of explanation

Applying for a modification requires trust in your mortgage company. That can sometimes be difficult, which is why a lot of people hire a lawyer to help them negotiate the modification. Applying for a modification is just like applying for a new mortgage. The bank requires documents to prove your income, expenses, and ownership of the property. You will have to disclose your assets, income, and expenses. There is really no reason to hide anything when your home is at stake, and you should know that in New York State, mortgage companies are required to consider loan modifications. They don't have to actually give you one, but they do have to it good-faith consideration where a financial hardship caused the default. If you suspect foul play, then you can report your mortgage company to the Department of Financial Services.

You start by getting the application forms from your mortgage company. Different companies will have different forms. Don't use any generic forms. Fill out the forms as thoroughly as possible and attach supporting documents. Those documents include proof of income, bank statements, and tax returns. Always keep a copy of your application and submit the application directly to the mortgage company or to your attorney who will submit it on your behalf.

Proof of income will likely need to cover a month or two. If you earn a wage or salary, then submit at least 30 days' worth of paystubs. If you have rental income, then you will need to submit the rent agreement and show the deposits of the rent in your bank account. If your tenant pays in cash, then you must deposit that cash to prove this income to the mortgage company. Social security and pension income require verification letters from the source of the income and deposits in your account. Self-employment income requires a profit and loss statement together with business bank statements and tax returns showing business income.

Bank statements must be all pages, even the ones that have no information on them, and cover at least two months of activity. The mortgage company needs to be certain you gave them complete statements, and the only way to do that is to see that last page. Also, if you have multiple bank accounts, then give them two or three statements from every account.

Tax returns are usually required, and they will have you complete an IRS 4506T form allowing them to get transcripts from the IRS. Make sure you give them all pages of the tax return and sign the return on the signature line on page 2 of the Form 1040. Makes sure all schedules and attachments are included.

The mortgage company will examine these documents closely. Your application will be delayed or rejected if you show income on your statements or tax returns that is not on your application or supported by paystubs or other proof of income. For example, if you have IRA distributions on your tax return because of a one-time withdrawal, but no IRA distribution statement, then you must submit a letter of explanation with your application explaining that it was a one-time withdrawal. Without that explanation, the underwriter will delay your application until the discrepancy is resolved.

Hardship letters can be helpful. In fact, you should write two letters, a hardship letter and a general letter of explanation. The hardship letter should briefly explain why you fell behind, such as jobs loss, injury, divorce, death in the family, or some other hardship. The letter of explanation should explain things like odd deposits or withdrawals on your bank statements, one-time or former sources of income on your tax return, and any discrepancies between your application and the supporting documents.

You may have to submit documents to prove your hardship, such as a divorce decree or death certificate. Injuries or disability can be proven by medical records or proof of receipt of disability benefits from your insurance company or the government. Some hardships, such as unemployment or reduced income, are proven by your tax returns showing unemployment benefits or significantly less income than the prior year.

Stay in touch with your mortgage company by calling them once a week to check the status of your application.

Loan modifications are the most common strategy for avoiding foreclosure. Bankruptcy is another viable option for saving your home. In rare cases, litigation can save your home, but only where the mortgage company committed egregious violations of the law. An experienced attorney should be consulted before you pursue any of these strategies.

About the author: Daniel Webster is a partner in the law firm Webster & Dubs, P.C. in Buffalo, NY. His law practice has focused on foreclosure defense and prevention since 2009. Other areas of practice include real estate, elder law, wills, trusts, and estates. Mr. Webster was previously a staff attorney at the Center for Elder Law & Justice in Buffalo. He went to college at Hamilton College, and graduated from the University at Buffalo Law School in 2008. He is also the President of the Board of the Buffalo Cooperative Federal Credit Union.