Loan Modification and a Look at the Home Affordable Modification Program
A Loan Modification is the process of permanently changing one or more of the terms of a Mortgagor’s loan outside of the original contract terms. Having a loan modification usually allows a loan to be reinstated, and results in payments the mortgagor can afford to pay.
A loan modification can change many different terms of the contract:
· Reducing the principal of the loan
· Lengthening the term of the loan
· Reducing late fees or penalties
· Reducing the interest rate of the loan
· Changing the interest rate to a fixed rate from a floating rate
· Adjusting the floating rate calculations
· Temporary postponing of payments
In 2008, the Home Affordable Modification act was passed in order to assist eligible home owners with their home mortgage debt by setting up a loan modification program. The purpose of the program is to help the 7-8 million eligible homeowners that are at risk of foreclosure keep their homes. The program was created under the Financial Stability Act of 2009.
Under the new program, home owners can obtain a mortgage loan modification if:
· Their loan began before January 2009.
· They have an unpaid balance up to $729,750 (with higher limits for multi-family homes)
· The total of the payments must exceed 31% of the gross monthly household income. These payments include principal, interest, homeowner’s insurance, and property taxes.
· There is documentation and proof of income, a signed IRS 4506-T, and a signed affidavit of financial hardship.
· Property owner must live in the home.
· Lenders would receive incentives to provide loan modifications for at-risk borrowers who have not missed payments even when at imminent risk of default.
· The borrower must be at most 5% underwater.
· Loan modifications can only occur once and will only happen until the end of 2012.
If these requirements are met, the loan modification may occur in many different ways. The program can:
· Share the reduction costs with the lender, potentially lowering the monthly payments down 31% debt to income ratio
· Give servicers who provide loan modifications $1,000 for each modification along with incentives on still-performing loans of $1,000 annually.
· Reduce the principal for homeowners that make payments on time up to $1,000 per year for up to five years.
· Create one-time bonus incentive payments of $1,500 to lender as well as $500 to servicers for loan modifications made while a borrower is not behind on payments
· Create incentives for getting rid of additional liens on loans modified under this program.