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Applying for a Loan Modification - What You Need to Know

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If you are having difficulty making your mortgage payments and you think that you qualify for the federal Home Affordable Modification Program (HAMP), here's how you can start your application process.

The program is subsidized by the U.S. government, but loans are made by the same private banks and lenders that provide loans to homeowners. If you think that you qualify for a loan modification, you need to contact your loan servicer. Your loan servicer is the entity to which you make your mortgage payments, and may or may not be the same company or bank that owns your loan.

If you are not sure if your loan servicer is part of the program, you can go online at Making Home Affordable where you will see a list of participating lenders. If your loan is owned or guaranteed by Freddie Mac or Fannie Mae, your servicer is required to accept and evaluate your application in good faith. The government provides incentives to lenders and servicers who complete HAMP loan modifications, and most U.S. loan servicers are on the list.

Foreclosure protection

Under HAMP you have some protection against foreclosure. When you apply for a HAMP loan modification, your servicer may not foreclose on your house until your application has been reviewed and, if you are found to be eligible; your servicer has offered a trial modification.

How your servicer determines your eligibility

Your loan servicer will use a set of guidelines to verify if your loan is eligible:

  • You are experiencing financial hardship
  • Your mortgage payment is more than 31% of your gross income
  • Your loan was signed on or before January 1, 2009
  • Your mortgage is for an owner-occupied house of one to four units
  • Your principal balance is no more than $729,750 for a one-unit home

If your loan appears to meet these basic eligibility criteria, your servicer will request more detailed information about:

  • Your current income
  • Assets and expenses
  • Hardship circumstances

The primary goal is to get your mortgage payment to be less than 31% of your income. To meet this goal your loan servicer may consider a variety of options including lowering your principal balance due, lowering your interest rate, granting a forbearance, and/or extending the term of your mortgage.

Net Present Value (NPV) test

To determine whether the value of the modified loan, including any federal incentives, will be greater than the existing loan, a Net Present Value (NPV) test is applied to your modified loan. If your new loan is of less value, the servicer is not compelled to offer a modified loan, but may still choose to do so.

Three-month trial

HAMP regulations state that the servicer must offer you a modification if the modified loan is determined to be of greater value than your current loan. If you agree to the modified loan offer, your modified loan will be in place for a three-month trial period.

During the three-month trial period, you are expected to make your mortgage payments on time. In addition, your lender will use this time to determine that your income and expense information is accurate.

At the end of the three-month trial period, if all the conditions have been met, your servicer will write up a permanent modification agreement. At this time you will sign the new loan agreement. You must also verify that all of the personal and financial information you gave to your servicer was authentic. Do not be tempted to shade the truth - it is a violation of Federal law to provide false information in order to get a HAMP modification.

Your mortgage rate

In the past few years many homeowners have found themselves unable to pay their mortgages because their adjustable-rate mortgage rate was increased. HAMP regulations state:

  1. If the new rate is at or above the market rate at the time your modified loan is signed, your new rate is fixed for the life of your loan.
  2. If your modified interest rate is below current market rate, your rate must stay the same for at least a period of five years. After that, your rate may go up no more than one percent per year until it reaches the rate that existed at the time the loan modification was signed.

Your credit score

If you agree to a loan modification, this will appear on your credit record. It is a negative, but it is much better than having a foreclosure appear.