By Michael L. Ferrin and C. Bradley Sellers
You can't open a newspaper or turn on a television these days without seeing or hearing something about residential loan modifications. There is no shortage of information and misinformation about what lenders are willing to do to assist homeowners who are having difficulty paying their mortgages in these difficult economic times. Although lenders are not required to modify mortgages, most are willing to do so either under criteria established by the individual banks or government sponsored programs.
Currently, the most common and effective of these programs is the Home Affordable Modification Program (HAMP), which was established under the Obama Administration's Making Homes Affordable Program. This article will discuss the eligibility requirements for a homeowner to qualify for a mortgage loan modification under HAMP.
For a homeowner to be considered for a loan modification under HAMP, he or she must meet the following basic requirements.
- Primary Residence - The mortgage must be on the borrower's primary residence.
- Date - The mortgage must be dated prior to January 1, 2009.
- Size Limit -The mortgage must be equal to or less than $729,750.
- Hardship -The borrower must demonstrate a hardship or change in circumstances making it more difficult to pay the mortgage. Examples of hardships include a significant increase in the mortgage payment due to increasing interest rates, a reduction in household income and an increase in necessary expenses such as medical bills.
- Debt to Income Ratio -The payment on the first mortgage (including principal, interest, taxes, insurance and HOA dues) is more than 31% of current gross income.
- Current Income – Show adequate current income to make the reduced payment if a modification is granted.
In addition to HAMP, many lenders have other programs available to help owners with investment properties, jumbo loans or who otherwise do not meet all the qualifications for HAMP. While these other programs may offer more flexibility and broader applicability, they still consider many of the HAMP requirements as factors in determining whether to modify a mortgage. Unfortunately, negative equity alone is not sufficient grounds for a modification. Homeowners who do not meet the requirements of a loan modification should explore the options of a short sale with their real estate broker or agent before walking away from a property and allowing it to go to foreclosure.
The modifications granted by lenders under HAMP have included forbearance agreements, interest rate reductions, conversion of ARMs to fixed rate mortgages, deferral of past due payments, and in rare cases, even principal reductions. The goal is to find a solution that will avoid foreclosure, which is extremely expensive to the bank, and allow the homeowner to stay in the property with a reduced monthly payment.
Some homeowners have been successful working directly with their lenders in applying for a modification under HAMP. Others have had assistance from non-profit organizations, loan modification companies and attorneys in negotiating with their lender. If homeowners desire assistance in working with their lender, they should be careful to hire only an experienced and reputable attorney or a properly licensed and bonded loan modification consultant. The loan modification process can be a lengthy one and it is important to seek assistance from someone who will see the matter through to its conclusion.
