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Who Qualifies for a Mortgage Loan Modification?

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The current economic difficulties have made it difficult for many homeowners to make their mortgage payments. Between layoffs, cutbacks, and fluctuating interest rates, many people with variable rate mortgages - and even some with traditional, fixed rates - are feeling the crunch.

Mortgage loan modification is designed to help struggling homeowners reassess their financial situations and alter their mortgages to make payments more manageable. But in spite of its potential benefits, loan modification isn't for everyone. How can you find out whether you qualify for mortgage loan modification?

About the Federal Loan Modification Program

President Obama passed the Homeowner Affordability and Stability Plan on March 3, 2009, pledging $75 billion to bail homeowners out of mortgage-related financial troubles. You may qualify for a government loan modification if you fit the following criteria:

  • The house in question is your primary residence
  • The amount on your first mortgage is within certain limits ($417,000 is the cap in some areas and as much as $729,750 is allowable in others)
  • The mortgage was taken out before January 1, 2009
  • The mortgage payment (including principal, interest, taxes, insurance, and homeowner's dues) is more than 31% of your gross income
  • You currently have a job that provides an income

In addition to providing evidence of all of the above, you must also demonstrate that your circumstances have changed in such a way that your mortgage payments are no longer manageable. You are likely to qualify if, since getting the original loan, your mortgage payments have gotten higher, your income has been reduced, or you've experienced a financial hardship (such as medical bills).

The Homeowner Affordability and Stability Plan will be able to help 4 to 5 million homeowners refinance their mortgages to achieve more manageable payments. These borrowers are likely to be selected based on a solid history of regular payments and good credit. Even if their home values have dropped enough to make a normal refinance impossible, the Federal loan modification plan offers hope for those hit hard by the economy.

Loan Modification with Banks and Lenders

For lucky homeowners whose property values have not dropped substantially, it may be possible to refinance or arrange loan modification with the bank without resorting to the Federal program. Under such circumstances, qualifying for mortgage loan modification will still depend on many of the same criteria's.

  • You live in the house as your primary residence
  • You can provide evidence of a steady source of income
  • Your mortgage is smaller than the actual, present assessed value of your house
  • Since taking out the original loan, your mortgage payments have become unmanageable due to rising variable interest rates, a loss of income, or a financial hardship

Some lenders require that you have fallen behind on payments before they will consider negotiating a loan modification, but this is not the case everywhere. Check with your lender on their individual requirements for loan modification.

Many lenders are willing to work with you (or with a representative from your loan modification company) before you fall behind on payments, as long as you can provide evidence of financial hardship or reduced income. It's a good idea to speak with your lender proactively, before debts pile up, to determine which options may be available in your circumstances.

You can also use a loan modification service - a third party company that works with your lender to help you get a loan modification. Using such a service can achieve the same positive outcome as working directly with the lender. Use caution and do your homework before hiring a third party service to help you. Check their rating with the better business bureau and do not pay them anything until your loan is modified.