Home Affordable Modification Program
Most loan modifications are made through the HAMP program. HAMP stands for Home Affordable Modification Program. The program has gotten off to a rough start with few homeowners actually getting permanent loan modifications. However numbers are improving with lenders under government pressure to make the program work.
Working with your lender can be a challenge. My experience has been that lenders are very disorganized in their administration of HAMP requests. They invariability lose paperwork and request the same documents over and over. Some documents expire after 30 days, which is the reason for some of those requests.
The HAMP program was modified on March 26, 2010. Changes to the program are incorporated into this discussion.
To qualify for a HAMP modification the mortgaged property must be your primary residence, the mortgage balance can't exceed $729,750 and the mortgage must date prior to January 1, 2009.
The idea behind HAMP is to lower your payments to 31% of gross income. There are three ways to accomplish this (other than your earning more money): lower the interest rate, extend the term of the loan, or reduce the principal amount of the loan. (It's actually deferred.)
The lender first examines the interest rate, lowering it in 1/8% point stages until your payments reach the magic 31%. If you don't qualify at 2% they then start extending the term of the loan to 40 years. If that doesn't work, the lender reduces the principal balance of the loan. The reduced amount is added to the end of the loan as a balloon. Fortunately the balloon doesn't accumulate interest. Now, in addition, the lender can "consider" writing down the principal of the loan (instead of deferring it.) Technically, the amount written off is treated as a forebearance, just like before, for three years and then it is actually written off over a period of time.
The HAMP program has a three month trial modification period. If you make your modified payments on time for the trial period you may qualify for a permanent modification. Many people fail to get a permanent modification because they neglect to send documents requested by the lender. For instance, the lender needs to see your most current pay stubs prior to making a final decision. Again, even if you send your documents as requested, there is no guarantee that your lender will be able to find them. (I recommend you put your loan number on the top of every page you fax or mail.)
Some people seeing a default on their mortgage payments coming seek to be proactive. They call their lender prior to missing a payment, hoping to get a modification before they default. The general rule is that the homeowner must be in default or face imminent risk of default in order to qualify for a modification. A default is defined as missing two or more payment. You are considered at risk of imminent default if your cash reserves are less than $25,000 and you can establish a true hardship such as permanent illness or disability, divorce, etc.
Under the March 26 rules, unemployed homeowners who receive unemployment insurance benefits can have their mortgage payments reduced for a period of three to six months. (The homeowner needs to ask the lender for this assistance within 90 days of missing the first payment.) When the homeowner eventually finds a job, the lender is required to consider the homeowner for a permanent loan modification if the income from the new job results in the mortgage taking more than 31% of monthly income.
Instead of intentionally missing payments to qualify for a HAMP modification you can opt for a FHA refinance. If your lender agrees, your 1st mortgage can be refinanced to an amount that doesn't exceed 97.5% percent of your homes current value. The reduction in principal cannot be less than 10%. If you have a second mortgage the total amount of your combined loans cannot exceed 115% of the value of your home. As an example, if your home is worth $200,000 and you have a 1st and 2nd mortgage of $400,000 the loans can be refinanced and written down to $230,000 ($200,000 * 115%). If you just have a 1st the loan can be refinanced and written down to $195,000 ($200,000*97.5%). (Please note that the refinancing option was announced in March 2010 and may not take effect until later in the year. Also keep in mind this program is voluntary and major banks may elect to not write down the loans.)
To qualify for a refinance you must be current on your mortgage payments, have a fully documented income and a credit score of 500 or better. Although this program will be put borrowers into FHA loans, the program is not available for current FHA borrowers.
Effective January 1, 2010 a lender must provide notice to homeowners who fail to qualify for a permanent or trial HAMP modification, listing the reason for the non-approval. The lender must also provide notice if it denies a permanent modification because it believes the homeowner has failed to provide all the requested financial documents. These are new, somewhat obscure rules put out by the Treasury Department and can be found at Supplemental Directive 09-01.