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2011-11-11 19:14:28

What is a loan modification?

A loan modification involves modifying the terms of an existing loan, typically to make it more affordable for a borrower in default or in imminent danger of default, for instance because of a scheduled rate increase or financial hardship. The terms commonly modified are the interest rate and/or the term of loan. A loan modification is not a form of mortgage loan refinance or second mortgage activity. One of the most common loan modification programs is President Obama’s Making Home Affordable Program.


About Loan Modification: Government Guidelines

More and more options are being made available now for people who are having trouble affording their monthly mortgage payments. Before the mortgage crisis, when a person got behind with their payments, they were almost sure to face foreclosure at some point. At that time, lenders lacked a consistent set of steps to follow when addressing a loan owner who had fallen behind. To “fix” the problem, they usually kept the monthly payments as they were and just added the missed payments onto the loan principal. This was good in theory, but struggling homeowners still couldn’t keep up with the monthly payments and fell hopelessly behind. But now the Obama administration has set up a consistent set of loan modification guidelines in the case of troubled homeowners through the U.S. Treasury.

The President’s new Making Home Affordable plan aims to alter the monthly payments of a loan, making them lower and more affordable for people. They should be equal to or less than 31% of a person’s gross monthly income. When lenders indentify a borrower as at risk for foreclosure, they now know exactly what to do. The U.S. Treasury put in place a clear set of steps known as the Standard Waterfall. The Standard Waterfall is as follows:

1)    Lenders ask for income verification from borrowers, including tax returns, pay stubs, and letters from employers.

2)    Lenders figure out a borrower’s monthly payment, including all applicable fees, taxes, and insurance – but not late payment fees accrued to that point.

3)    Lenders look at the monthly payment as a function of gross monthly income. They will try to get the monthly mortgage payment down to 31% of the gross monthly income, known as the 31% debt-to-income ratio (DTI).

4)    Lenders begin to reach the goal DTI by making incremental interest rate reductions of 0.125%. They continue to do this until a floor interest rate of 2% is reached.

5)    If the 31% DTI is still not reached, the lender may extend the loan term up to 40 years from the time of modification.

6)    If the 31% DTI is still not reached, the lender may choose to forbear principal, which is due in a balloon payment at the end of the loan.

For every loan modification they do, lenders get an incentive check for $1,000 from the government. They are supposed to follow the Standard Waterfall steps above, perform a cost analysis, and decide if the incentive payments will give them a better outcome than foreclosure would. If they decide this is true, then they will proceed with the mortgage modification. After making payments on the modified loan for a three-month period known as the trial period, the new interest rate will stay fixed for the next five years.

To see if you qualify for the Making Home Affordable Program; click on the link and fill out the form: You can also call 1-800-896-3125 for a free consultation.

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