If all you're hearing about is foreclosures and defaulting on home loans, there is a glimmer of hope on the horizon. It's called a loan modification. Loan modification involves changing the terms of a mortgage in order to make the loan more affordable for the mortgagor. This makes payments more manageable, allowing people to stay in their homes.
In July 2009, guidelines for President Obama's "Home Affordable Modification Program" were released. This program will allow those with FHA loans to significantly reduce their monthly mortgage payments by renegotiating the terms and conditions of their mortgages with their lenders. The plan is backed by $75 billion dollars, aimed at helping consumers avoid foreclosure. (For more insight on government programs to stabilize the housing market, see Battling Foreclosure: The HOPE NOW Alliance Strategy.)
Loan Modifications and Obama's Plan
Defaulting on a mortgage loan is not in the best interest of a homeowner or lender. If the bank is forced to foreclose on a home or try to collect payments, this can be costly for the bank. For homeowners, foreclosure means not only losing their homes, but devastating their credit score as well. (Read 5 Keys To Unlocking A Better Credit Score to learn how to rebuild a ruined credit score.)
Under the Home Affordable Modification Program, there are several ways to modify a loan. Refinancing tends to be a challenge in a down market, when appraisals fail to come in high enough, leaving homeowners upside-down in their mortgages. However, under the Home Affordable program, banks are working with borrowers by offering options such as reducing the principal owed, reducing interest rates or even extending the term of the loan. (For more insight, see Mortgages: The ABCs Of Refinancing.)
Home Affordable Modification Program Eligibility Requirements
However, there are some eligibility requirements to be part of Obama's plan:
- The loan origination date must be on or before January 1, 2009.
- This program will not accept any new borrowers after December 31, 2012.
- The property cannot be a rental property, and must be owner-occupied as a primary residence of one to four units.
- The loan principal balance on a single-unit home must be less than $729,750.
- Borrowers must show that they do not have the funds available to make their payments without modification. (For more on this metric, see Conquering The LTV Ratio.)
- Borrowers must not owe more than 125% of the value of home.
- The loan must be a Fannie Mae or Freddie Mac loan.
For those who cannot refinance their homes and cannot afford their payment, mortgage modification may be a viable option.
The goal of Obama's plan is to reduce borrowers' mortgage payments to below 38% of monthly income. One way to do this is by reducing the interest rate charged. However, 2% is the lowest interest rate the banks can offer under this plan. If the payment is still too high for the mortgagor, the life of the loan can be extended up to 40 years. The principal of the loan does not have to be reduced, but banks may also do that. Lenders are being given incentives in order for them to help homeowners this way in the form of $1,000 for each modification and another $1,000 each year for up to three years if the borrower makes his or her loan payments.
Important Details About Consumer Protection
Some important things to note are that the borrower does not have to be late to qualify for the program. In addition, lenders that refuse to work with you on your loan could be in legal violation of their responsibilities. Finally, there are always going to be some scam artists out there waiting to take advantage of struggling homeowners. Be sure to call your lender if you get any calls about mortgage modification. (See Avoiding Foreclosure Scams to learn more.)
With this new plan, there are no borrower fees for loan modification. So, if you do opt to modify your loan, be sure that your lender is not charging you modification fees, notary fees, credit report fees or any property valuation fees. No cash should be required from the borrower.
To protect the consumer, the lender is still required to adhere to the usual fair lending practices. This means it must provide information to the borrower regarding the modified loan, costs and any risks. It must also comply with the Equal Credit Opportunity Act and Fair Housing Act. Therefore, the borrower cannot be discriminated against due to race, religion, national origin, sex, martial/family status, age or handicap. (To read about possible loan scams, see Homeowners, Beware These Scams!)
Should You Get One?
How do you decide if you should get a loan modification? The first step is to visit the Help for America's Homeowner Site, where you can decide whether it would be better to refinance or go with a loan modification.
If you do not qualify for Obama's plan, there are still banks that may be willing to work with you on loan modifications. Be sure to ask your lender what it can do to help you. Also ask for references from others who have had successful loan modifications. Keep in mind that if you modify your loan outside the plan, you may be subject to fees. Find out up front what those fees may be.
If you do call your lender to find out what it can offer you, be prepared with your income and budget figures so that you will be able to discuss what you can afford. Your bank will want to see your proof of income (paychecks stubs, etc.), expenses (they can get most of these from your credit report), bank statements and any loan agreements. Whether you qualify for the Home Affordable Modification Program or not, know that your lender may not be enthusiastic about modifying your loan, and/or may not have the personnel needed to handle your request in a timely manner.
The good news is that there are some options out there for borrowers who are trapped in an upside-down mortgage that they can't afford to pay. If you have been told that you can't refinance because your house is not worth enough, foreclosure may not be inevitable. If you're in this situation, the Home Affordable Modification program may be an option. As a last resort, you can always attempt to get the bank to modify your loan as well.(For related reading, check out Saving Your Home From Foreclosure and Should You Refinance Your Mortgage When Interest Rates Drop?)