In order to avoid foreclosure, your lender may agree to modify some or all of the terms of your loan. A loan modification is a negotiation between you and your lender. It begins by contacting your mortgage company, discussing your problem, and proposing a solution that involves modifying the loan.
How Government Loan Modification Programs Work
The purpose of a mortgage modification is to get your monthly payment to a more affordable level. An “affordable” mortgage payment is typically defined as 31% of the borrower’s monthly gross income. So for example, if you earn $4,200 a month, then your loan will be modified to be 31% of your income, or $1,302 per month in this case.
The federal government and the Department of Housing and Urban Development (HUD) have created and recently updated several loan modification programs for a person’s primary residence.
Home Affordable Modification Plan (HAMP)
The Obama Administration introduced HAMP as part of the Making Home Affordable plan to stabilize the housing market. Under the federal loan modification plan, your monthly loan payments are reduced by modifying one or more components of your mortgage:
- Lower the interest rate
- Extend the life of the loan
- Lower the loan principle
As long as you can verify a legitimate financial hardship that impacts your ability to make your loan payments, you may qualify. Contrary to popular belief, you do not need to be behind on your payments before a lender will consider doing a loan modification with you. If you are behind on your payment or facing foreclosure, applying for a loan modification places a temporary halt on the foreclosure process.
In order for your loan to qualify for modification under HAMP, the following conditions must apply:
- You obtained your mortgage on or before January 1, 2009.
- You owe up to $729,750 on your primary residence or single unit rental property.
- You owe up to $934,200 on a 2-unit rental property; $1,129,250 on a 3-unit rental property; or $1,403,400 on a 4-unit rental property.
- The property has not been condemned.
- You have a financial hardship and are either delinquent or in danger of falling behind on your mortgage payments (non-owner occupants must be delinquent in order to qualify).
- You have sufficient, documented income to support a modified payment.
- You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
What if I don’t qualify or have been denied?
Unfortunately not all struggling homeowners qualify for the government modification program. Credit.org, a HUD-approved housing counseling agency, has developed three programs to help homeowners who have been denied or do not qualify for this federal program:
- The Home Affordable Foreclosure Alternatives (HAFA) Program – Government assistance for a short sale or deed-in-lieu of foreclosure
Other Loan Mod Programs
- VA Loan – If your home mortgage is a Veterans Administration (VA) loan, then there is a specific government program called the Cal Vet Modification.
- FHA Loan – There is a loan modification program specifically for Federal Housing Administration (FHA) loans
- None of the Above – Banks who do not participate in the government programs may have their own unpublished loan modification programs with a different set of qualifications.
How to Apply for a Loan Modification – 3 Simple Steps
If you are currently facing a financial hardship and want a loan modification, then know that time is of the essence. You have a greater ability to negotiate with your lender earlier on in the foreclosure process than later. Get started today:
- Collect Your Financial Information
You’ll need to provide your current income and expenses.
- Collect Your Mortgage Information
Get a copy of your mortgage statement that has your loan number on it.
If you’re ready to begin negotiating for a loan modification, get some free advice before contacting your lender. Talk to a nonprofit housing consultant from a HUD-approved agency and find out how likely you are to qualify for a loan modification based on your individual mortgage and financial situation.
Nonprofit housing consultants from a HUD-approved agency can provide you with:
- All available loan modification options
- A customized action plan
- Budget suggestions
- Help in negotiating with your lender