Top 5 Loan Modification Questions

What is a loan modification?

A loan modification is a change in the original mortgage to benefit the homeowner.  Some of the benefits that a homeowner can receive from a modification are a reduction in interest rate, a reduction in principal, forgiveness of late fees or other penalties, lengthening the loan term, forbearing interest until the end of the loan term, and capping the monthly mortgage payment to a reasonable payment that is affordable to the borrower. 

What is an acceptable Hardship situation?

An acceptable hardship could be many different scenarios such as a loss of income or loss of job, higher expenses, a death or illness in the family, an ARM (adjustable rate mortgage), divorce, an increase in expenses due to a new unexpected debt, federal or state tax issue, lawsuit settlement or any one of a hundred different scenarios that make it harder to pay your bills.

Can I do a loan modification myself or should I pay someone to represent me?

Unlike what most Attorneys will tell you, you can do a loan modification yourself. Your lender will encourage you to proceed with a loan modification without the use of an attorney so you can save money and have more money to make mortgage payments.  Before starting a modification, I would encourage you to do research so that you structure your loan modification in a way that it gives you the lowest possible payment. 

Can I get my principal reduced if the loan amount is greater than the value of the house?

     It is possible to get your principal reduced if you are "upside down on your house", owe more than the house is worth.  This is a scenario that most people wish for but rarely it happens.  Typically, a modified mortgage will consist of a loan payment based on a principal amount with an affordable payment at an interest rate of as low as 2% and stretched out up to 40 years.  If the new principal amount of your mortgage is lower than the original mortgage principal, the difference between the two principals typically will be your new deferred balance or could be a principal reduction.  In most cases the difference will be your new deferred balance.  This new deferred balance does not collect interest and you will not have to make payments on that amount until your new loan term is due in full, typically in 30 years. 

     The difference between your original principal balance and your new principal balance could also be your new principal reduction.  Keep in mind that if your principal is forgiven, you will get a 1099-C form for the forgiveness of debt.  This means that the forgiveness of debt will give you additional income for the year and it will be taxed as ordinary income.  This is a small price to pay for a free gift. 

Do I have to be currently delinquent on my payments to get a loan modification?

     There is a common misconception regarding loan modifications and that is that most people think that you have to be late on your mortgage payment to get a loan modification.  That is not true.  The whole idea of the loan modification program is to help home owners before they go late on their mortgage payments.  Studies have shown that once a home owner is more than ninety days late on their mortgage payment, the majority of the time the homeowner will end up losing their home to foreclosure.  Lenders realize this and want to get help to the homeowners who are on the verge of being late on their mortgage.  The whole idea of loan modifications is to keep homeowners in their homes and stop the foreclosure fiasco.  It does not matter if you are late on your mortgage or on time, you can get a modification either way.

How Difficult is it to File My Own Loan Modification?

The majority of homeowners get intimidated when it's time to refinance their home because they want to make sure that they are not getting ripped off by a mortgage broker who tries to charge as much as he can to achieve a higher commission.  The same can be said for when it is time to buy a new car.  These are times in people's lives that they don't usually look forward to because they are stepping out of their comfort zone.

Recently, our Government has come out with a new modification program HAMP that was designed for homeowners to receive help in lowering their mortgage payments without the use of a third party.  This is another program that creates anxiety for the homeowner who does not typically know how the process works so in many cases they will hire someone to do it for them.  Attorney's and loan modification companies have popped up everywhere doing modifications and charging high fees to do so.   Loan modifications are simple and these companies are charging big bucks to do them and not necessarily giving people the results they wanted.  

We live in a society where we want things done right now and we love services that make our lives easier.  I believe that a loan modification is something that needs to be done right because you will be the one making the mortgage payments for the next 30 years.  And when you want things done right, you should do them yourself.  

To get a loan modification you will need to be able to get the modification application and fill it out.  How hard could it possibly be to read an application and answer personal questions about yourself?  Well, it is not that difficult to fill out the application but the whole idea is to fill it out in such a way that best benefits your situation.  The hardest part and most important part is to fill out the application in a way that gets you approved.  

There are many resources out on the internet that claim they can teach you how to get your mortgage modified but I would be wary unless they can prove their teachings by showing actual results.  The same holds true for attorneys and modification companies that say they have gotten great results but will not be able to guarantee you anything other than, "will do our best".  Talk is cheap but the money you will spend on an attorney is not! 

          

In brief, attorneys and modification companies will sell you on the idea of them getting others great results and they won't be able to guarantee you anything.  Personally, I would have a hard time giving them $3,000 of my hard earned money with the possibility of getting nothing in return.  Why not educate yourself and file the three page application yourself? 

Loan Modification Programs

Home Affordable Modification Program (HAMP) 

HAMP is the program that the majority of homeowners will be eligible for. 

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If you are having a tough time making your mortgage payment for other reasons besides unemployment, you may qualify for HAMP. HAMP lowers your monthly mortgage payment to 31 percent of your verified monthly household gross income to make your payments more affordable. Typically, the HAMP modification results in a 40 percent drop in a monthly mortgage payment.  So far, Eighteen percent of HAMP homeowners reduce their payments by $1,000 or more. 

Eligibility

You may be eligible if you meet all of the following criteria:

• the home is for your primary residence
• You obtained your mortgage  before January 2, 2009
• Your mortgage payment is more than 31 percent of your monthly gross income
• You owe less than $729,751 on your home
• You are in danger of falling behind on your mortgage and you have a financial hardship
• You can verify your income to support the modified payment
• You can't have a conviction 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.

Principal Reduction Alternative (PRA) 

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PRA was designed to help homeowners whose homes are worth significantly less than they owe by encouraging servicers and investors to reduce the amount you owe on your home. 

Eligibility

You may be eligible for PRA if you meet the following criteria:

• Your mortgage can't be owned or guaranteed by Fannie Mae or Freddie Mac.
• Your home has negative equity, you owe more on it than it is worth, or your home is upside down
• the home is for your primary residence
• You obtained your mortgage before January 2, 2009. 
• Your mortgage payment is more than 31 percent of your gross monthly household income
• You owe less than $729,751 on your home
• You are in danger of falling behind on your mortgage and you have a financial hardship
• You can verify your income to support the modified payment
• You can't have a conviction 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.

Second Lien Modification Program (2MP) 

The 2MP program is for people who were able to get their first mortgage modified through HAMP.  2MP is designed to work with HAMP to increase long-term affordability and sustainability for homeowners.  If you servicer is participating in  2MP, after your first mortgage is modified they will automatically evaluate your 2nd mortgage. 

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Eligibility

 You may be eligible to apply if you meet all of the following criteria:

• Your first mortgage was modified under the Home Affordable Modification Program.
• You can't have a conviction 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.
• You have not missed three consecutive monthly payments on your HAMP modification.
• Your second mortgage balance is greater than $5,000.
• Your current monthly second mortgage payment must be greater than $100.

FHA Home Affordable Modification Program (FHA-HAMP) 

This program is for people with a Federal Housing Administration (FHA) loan.Page Content  The FHA Home Affordable Modification Program (FHA-HAMP) is a program for struggling homeowners that works to lower your monthly mortgage payment to 31 percent of your verified monthly household gross income to make your payments more affordable.

USDA's RHS Special Loan Servicing 

If you have a loan that is insured or guaranteed by United Stated Department of Agriculture (USDA), you may be eligible for their modification program.  The United Stated Department of Agriculture (USDA) modification program, strives to help struggling homeowners reduce their mortgage payments to 31 percent of their monthly gross household income.

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Veteran's Administration Home Affordable Modification (VA-HAMP) 

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If you have a loan that is insured or guaranteed by the Department of Veterans Affairs (VA), you may be eligible for their modification program. FHA, VA and USDA all offer programs for struggling homeowners with the sole purpose of reaching a new modified monthly mortgage payment of 31 percent of your verified monthly gross household income.

Time Might be Running Out for Loan Modifications

On Tuesday, March 29, 2011, the House voted on H.R. 839, the HAMP Termination Act of 2011.  The House passed the HAMP Termination Act of 2011 on Tuesday by a vote of 252-170.  The legislation amends the Emergency Economic Stabilization Act of 2008 (TARP) to terminate the authority of the Secretary of the Treasury to provide new mortgage modification assistance under the Home Affordable Modification Program (HAMP), with the exception of existing obligations to homeowners who already have an offer to participate in the program.  

When announcing the program, the Obama administration promised that HAMP would help upwards of three million at-risk to avoid foreclosure by reducing monthly payments to sustainable levels.  In the two years since the start of the HAMP program, the amount of foreclosures filed has been huge: 2.8 million in 2009 and 2.9 million in 2010. Foreclosure filings for 2011 are projected to increase 20% from 2010, and will most likely exceed three million homeowners.  Even Obama’s Treasury Secretary Timothy Geithner has the realization that HAMP won’t come close to helping the promised three million homeowners. 

The Home Affordable Modification Program (HAMP), part of President Obama’s “Making Home Affordable” (MHA) initiative, started off with the Treasury Department receiving $30 billion of TARP funding to pay servicer, borrower, and investor incentives under HAMP.   As of December 2010, approximately 520,000 permanent modifications were in place under HAMP at a cost of just under $1.0 billion.  The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) quarterly reports, in addition to reports from the Government Accountability Office, have been particularly critical of the Program.

The Home Affordable Modification Program (HAMP), is a great program for the homeowners who are able to make it work for them.   The HAMP program is designed for homeowners to file their own loan modification and a three page application makes it easy to do so.  

When the bill reaches the Democrat-held Senate, it will most likely fail.  If the HAMP Termination Act of 2011 passes in the Senate, Obama has said he will veto the bill.  It is, however, only a matter of time before the housing market improves and the HAMP modification program is no longer available.  So in the meantime, if you are a homeowner, I would encourage you to apply for a loan modification before it is too late.