HAMP is even more far-reaching: the government has committed $75 billion as an incentive for lenders to modify the terms of existing loans for three to four million homeowners. The goal of the HAMP program is to reduce the homeowners’ housing expense payments (principal, interest, taxes, insurance, PMI, HOA dues, etc.) to an amount they can currently afford and be able to sustain in the future. Payment reductions will mainly be accomplished through lowering interest rates and extending the term of the existing loans. However, principal reductions may also be considered in some situations if interest rate reductions and extended terms do not get the monthly payments to an affordable level for the homeowner.

These two basic programs have very different qualification requirements. In order to be successful with either of these government programs, homeowners need to know and abide by all the rules. In Part 1 of this 3-part series, we will discuss the details of the Home Affordable Modification Program.

THE HOME AFFORDABILITY MODIFICATION PROGRAM

This is the program that most people have heard about and the one that is getting lots of attention from the press. It was designed to help approximately three to four million Americans keep their homes from going back to the lenders through foreclosure. Plus, borrowers who make timely payments on their modified loans will receive success incentives. The government will pay an incentive that reduces the principal balance on a homeowner’s loan for every month a payment is made on time. The incentive will be applied directly to the loan balance each year for up to five years. The government has earmarked $75 billion for incentives to lenders and homeowners in order to help accomplish the goal of keeping more Americans in their homes.

1. Who is this program for?

This program is specifically designed for people who have a strong desire to stay in their home, but who are having trouble making their current mortgage payment(s). The people who will qualify for this program also need to have the ability to pay the monthly mortgage payment once the terms of their loan are modified to provide a new lower payment amount, which will be determined by program guidelines. People without income or with very little income will not qualify for this program.

2. Do loans have to be owned or securitized by Freddie Mac or Fannie Mae to be eligible for this loan modification program?

No. Loans serviced/owned by any lender are eligible for this program. Lender participation is voluntary, but the government is encouraging all lenders to help homeowners where they can.

3. What are the eligibility requirements?

• The program is only available for principal residences; properties held only as rentals do not qualify.
• You may be eligible for assistance if you are the owner occupant of a one- to four-unit property (if the unit is a duplex, triplex or a fourplex, the owner must occupy one of the units).
• Your current loan must have been originated prior to January 1, 2009.
• The current loan balance for a single-family home must be equal to or less than $729,750. Depending on the lender, higher limits may be available for two-, three-, or four-unit properties.
• The homeowner must have a current mortgage payment that is not affordable due to a verifiable hardship, such as an increase in mortgage payment due to an adjustable rate mortgage (ARM) loan or interest-only loan, or illness, divorce, death, job loss or other reduction of income, etc.
• One cause for the record number of foreclosures in today’s real estate market is that some homeowners have housing cost to income ratios of 50 to 60 percent! To qualify for assistance under this program, one’s current mortgage payment (including principal, interest, taxes, insurance, PMI, HOA fees, etc.) must be higher than 31 percent of the gross monthly (pre-tax) borrower’s total income. For example, if a homeowner had a gross monthly income of $2,500, the current mortgage payment would have to be higher than $775 per month in order for the homeowner to qualify under the program guidelines.

4. Does the borrower’s credit score(s) matter?

No. The program is for modifying the existing loan. No new loan is being originated, so the borrower’s credit is not part of the consideration.

5. Can the homeowner be behind on their mortgage payments?

Yes. The purpose of this program is to help homeowners keep their home, so it is specifically designed for people who are facing foreclosure.

6. Does the homeowner have to be behind on their mortgage payments?

No. Borrowers who are struggling to remain current on their mortgage payments, but who are still current, are eligible if they are at risk of imminent default (for example, from an adjustable rate mortgage that is going to adjust upwards in the near future). However, the homeowner will have to provide documentation of the hardship.

7. How will the lender determine how to modify the loan?

A lender can modify the existing loan in several different ways, but the goal is to end up with a payment (including principal, interest, taxes, insurance, PMI, HOA fee, etc.) that is no more than 31 percent of the borrower’s gross (pre-tax) income. The lender will generally take the documented total income and multiply it by 31 percent to get the target payment. The current loan interest rate is then lowered to see if that will bring the payment to where it needs to be. The government is providing incentives for lenders to bring interest rates down to as low as two percent if required. If that doesn’t reduce the payment to the target amount, the length of the loan term can be extended to 40 years. If the payment still has not been lowered to the target amount, the lender can consider a reduction in the principal amount owed, but this scenario will not be common.

The borrower has to have sufficient income to make the new, lower payment, or they will not qualify for the loan modification. If they can’t qualify for a loan modification, they will most likely need to consider a short sale of their property in order to avoid foreclosure.

8. When should a homeowner apply for a loan modification?

Apply as soon as possible. Don’t wait until your property goes into foreclosure. The sooner you get started, the easier the loan modification will be. A property that is in foreclosure still qualifies for loan modification, but since the lender may opt to just continue with the foreclosure at that point, waiting too long to start the process could result in the loss of your home.

9. Should I use a loan modification specialist to help me with my loan modification?

This is a decision you need to make based on your ability to handle the process properly. If you do not have the time to completely research all of your options, gain an understanding of all the rules, put together a complete and convincing loan modification package, and contact and negotiate with your lender, you would probably be better off hiring an expert with experience to negotiate for you. You only get one shot at the loan modification, and if you get turned down, or don’t get the terms you need to solve your problem for the long haul, you may not get another chance for awhile. Some lenders are saying they will only consider a loan modification once every 12 months. Therefore, it’s critical to do it right the first time. It could mean the difference between keeping and losing your home.

10. What documents are required for a complete loan modification package? Each lender may be a little different, but as a minimum, provide the following:

• A letter describing your hardship. Why is it that the loan is now unaffordable? What has changed in your life? What has changed with the loan? This is a critical part of the package. You need to prove and verify that you do have a real hardship.
• A cover letter describing why it is important for your family to stay in the home. The lender needs to know that you really want to stay and will make every effort to meet the new payment requirements.
• Proof of monthly gross income for all borrowers on your loan. Include recent pay stubs and documentation of income from any other sources.
• Your most recent tax returns
• Second mortgage information, if applicable
• Account balances, monthly payments on all debts, including student loans, car loans, private loans, etc.
• Account balances, minimum monthly payments for all your credit card debt and revolving charge card debt
• Other information such as proof-of-employment statements from employer, etc.
• Information about other assets

11. How long will the loan modification program be available?

The program will be available through December 31, 2012. All loan modifications must be in place by that date.

The Home Affordable Modification program is being put into place to help many homeowners keep their homes. If you think you qualify, don’t hesitate to apply for this program. But remember, knowledge is key to you success. Get educated on this program and seek the professional help you need. Make sure you complete your loan modification application and documentation package right the first time; you might not get a second chance.