The loan modification process isn’t difficult, but it is cumbersome. Here’s how to negotiate some of the curves.
What is a Loan Modification?
Loan modifications come in a variety of shapes and sizes, but they all are designed to help you make your mortgage payments and stay in your home. The kind of modification your lender offers to you will depend upon your lender, on the kind of loan you have, and, perhaps most importantly, the investor on your loan.
Investor? Who owns my loan?
Lenders make some of their money on your home loan by selling it to an outside company and then servicing it for a fee. Your 30 year fixed mortgage, for example, might be for $300K. The lender can wait the entire 30 years to get their money back, or they can sell it to an investor for, say $200K and collect the remaining $100K in fees from the investor. The promise to the investor, however, is that you, the homeowner, will make your payment every month. When you can’t because, perhaps you’ve been laid off, the investor turns to the lender for the missing payments. It’s part of why lenders are so willing to help you modify the loan: if they can get the investor to take a reduced payment from you, everyone ends up happy.
Some modifications can simple interest rate reductions – your original loan was at 6%, but the investor will accept a 4% return. Other modifications might place the past due amount on the end of the loan, while still others may forgive the past due amount altogether. These are mostly internal modifications, offered solely by the lender and its investors.
The modification you are looking for is HAMP, the Home Affordable Modification Program, which was started by President Obama in 2009. This modification reduces your mortgage payment to just 31% of your gross income as it stands today. For example, perhaps your mortgage payment is $2100 today, but your income has been reduced all the way down to just $3000 a month before taxes and deductions. There’s no way you could pay that mortgage. HAMP, reduces your payment to just $930 a month. Past due amounts are added onto the back end of the loan, and that’s your new payment in perpetuity.
It also eliminates your foreclosure. It gives you a clean slate with a very attractive payment.
But getting HAMP isn’t a walk in the park. When you call your investor for help, there’s a basic battery of tests you have to pass before you qualify. Here they are:
Published in: Personal Finance