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The Making Home Affordable Program - a Complete Guide

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For homeowners who are finding it harder and harder to make their mortgage payments, it's important to know that several mortgage assistance programs and services exist. Understanding the relief options available, as well as knowing how and where to reach out for help, is vital to increase the chances of reaching a satisfactory financial solution. In this article we take a close look at one program designed to give relief to struggling homeowner's - the U.S. governments Making Home Affordable program. We'll examine what this program seeks to accomplish, review the qualification requirements, and see how a homeowner can request assistance.

In March of 2009, the Obama Administration unveiled its plans and guidelines for the Making Home Affordable program. This program was in direct response to the devastating housing market collapse and economic crisis that we now refer to as the Great Recession. Millions of American were, and unfortunately still are, experiencing layoffs or reduced wages and consequently finding it difficult to make timely mortgage payments. Bringing current a delinquent mortgage by refinancing the loan, or selling the home - both reliable options at one time - are often no longer possible...thanks to the sharp devaluation of home prices throughout the country. To address the mortgage problem - the Making Home Affordable program, as part of a larger encompassing Financial Stability Plan, seeks to assist 7-9 million homeowners by reducing their mortgage payments to more affordable levels.

The Making Home Affordable plan itself is made up of two primary programs - the Home Affordable Modification Program, and the Home Affordable Refinance Program.

Home Affordable Modification Program (HAMP)

The word "modification" has been in the news a great deal since the housing crisis struck. It means, in this context, to change the terms of a loan contract (e.g., payment, interest rate) without actually refinancing the loan. In other words, the current loan contract is modified to allow for a lower payment. HAMP brings together the government, mortgage lenders and servicers, and struggling homeowners in an effort to reduce monthly mortgage payments in situations where a home sale or refinance is unfeasible.

Critical to this program is the fact that delinquency is not a requirement for eligibility. Since loan modifications are more likely to succeed if they are made before a borrower misses a payment, the program aims to address mortgage problems before payments fall behind.

HAMP Requirements:

  • Home has to be primary residence
  • The current first mortgage balance must be equal to or less than $729,750 (above this amount is considered a non-conforming mortgage per Fannie Mae and Freddie Mac guidelines)
  • You are having trouble making your mortgage payment - via reduction of income, increase of mortgage payment, or other hardship.
  • Current mortgage was taken out before January 1st, 2009
  • Housing expense (including mortgage payment, taxes, insurance and homeowner's association dues, if applicable) are greater than 31% of your gross income.

The key figure in the HAMP program is the housing expense ratio noted in the last bullet point above. The intent is to make the homeowners housing expenses no more that 31% of their gross income.

How Does the Home Affordable Modification Program Work?

The mortgage servicer will first have to reduce monthly mortgage payments so that the homeowner's housing expense is no greater than 38% of their gross income. Next, the program will match further reductions in monthly payments dollar-for-dollar, from 38% down to 31% debt-to-income ratio for the borrower. To reach the target affordability level of 31%, interest payments will first be reduced down to as low as 2%. If at that rate the debt to income level is still over 31%, servicers then extend the term or amortization period up to 40 years, and finally forbear principal at no interest (i.e., lower the mortgage balance) until the payment is reduced to the 31% target. Changes made to HAMP on January 28th, 2010 dictate limits on how much principal servicers are required to forbear.

To ensure long-term affordability, the modified payments will be kept in place for five years and the loan rate will be capped for the life of the loan. After five years, the interest rate can be gradually stepped-up by 1% per year to the conforming loan survey rate in place at the time of the modification.

Homeowners with a high debt-to-income ratio (a ratio measuring all debt such as housing expenses, car loans, credit cards, etc...) will be required to enter a certified consumer debt counseling program. They will, however, still be eligible for the modification program.

If a homeowner meets the inital requirements, the mortgage servicer then initiates communication with the homeowner in order to gather the required documentation, of which income verification is perhaps the most critical. Two possible scenarios exist at this point - first, the servicer may accept a verbal statement from the homeowner as to their income level. This allows the homeowner to enter a trial modification period relatively quickly, with the onus on them to provide the required documentation (including income verification) during the trial period. The second scenario is where the servicer requests the income documentation and modification application upfront and before allowing the homeowner to enter the trial modification period. Effective June 1st, 2010, the homeowner must, in all cases, provide income verification documentation to the servicer before entering a trial modification period.

The trial modification period is used as a gauge to determine whether the homeowner can reliably make the modified payment. Three timely monthly modified payments are required during this trial period, at which time the servicer will consider the modified payment to be the homeowner's permanent mortgage payment.

Home Affordable Refinance Program (HARP)

This plan is designed to help homeowners, who have been keeping their mortgage up to date, to lower their mortgage payment by refinancing their mortgage before potential problems arise. As mentioned already, falling home prices have made it much more difficult to refinance a mortgage. Mortgage lenders, industry-wide, typically will not lend more than 80% of the value of a property (this is called Loan to Value). Hence, if your home is worth $300,000 for example, you cannot refinance your mortgage if you own more than $240,000 on the home ($300,000 X .8). HARP enables homeowners, who otherwise would be unable to refinance their home, a program to do just that - refinance their mortgage and reduce the monthly mortgage payment.

HARP Requirements:

  • Own (and reside) in a 1 to 4 family residence
  • Have a mortgage that is owned or guaranteed by Fannie Mae or Freddie Mac*
  • Current on the mortgage payments (i.e., no payments past 30 days late in the last 12 months)
  • Amount you owe on the first mortgage is about the same or less than the current value of the home (you may be eligible if the first mortgage balance does not exceed 125% of the value of the home)

* Find out if Fannie Mae or Freddie Mac owns or guarantees your mortgage.

Where to go for Assistance

To apply for assistance, for either the HAMP (Mortgage modification) or HARP (mortgage refinancing) programs, all you need to do is go the Making Home Affordable web site. The site includes easy-to-follow instructions to determine whether you qualify - and how to proceed with the process. The sooner you seek assistance - the more likely a resolution can be found.