Real Estate Law Article: Options for Home Loan Modifications
If you are facing a foreclosure, you have several program options in negotiating a workout with your lender. Here are a few of the best programs:
Making Home Affordable Modification Program
The Making Home Affordable Modification Program, or HAMP, is a government-sponsored program that allows you to lower your monthly mortgage payment to 31% of your gross income. The lender will typically lower your payment by lowering the interest rate to as low as 2%, extending the length of the loan up to 40 years, and offering a principal forbearance or deferral. The lender also has the option to forgive a portion of the principal. The interest rate will be fixed for five years and then adjusted upward by 1% per year until the interest rate cap is reached. The costs of the foreclosure as well as any unpaid taxes or insurance will be added to the principal balance of the modified loan.
Only a mortgage in first position may be modified under this program. If you have a second mortgage, it usually must be extinguished first. Often, an incentive is paid to the mortgagor in first position to help satisfy any junior lien holders. Speak with a HUD-approve counselor or a real estate attorney to determine how to handle your second mortgage in this situation. You may also qualify for the Second Lien Modification Program described below.
You will also receive an incentive if you stay in the program and make each monthly payment. For each year that you do so, for a total of five years, you will receive a $1,000.00 payment that will be applied to the principal balance of your loan. You can accrue up to $5,000.00.
The lender will usually suspend the foreclose proceedings while they consider you for the HAMP program. If you are accepted, you will have to make three monthly payments on a trial program. If you make these three payments your modification will be permanent. If you miss any of these payments, you will not receive a permanent modification and the foreclosure proceedings will resume. However, the Home Affordable Foreclosure Alternatives, which is part of the HAMP program, has a streamlined process for short sales or deed-in-lieu of foreclosures for homeowners who cannot complete the program.
To be considered for this program, your home must be your current primary residence, the amount you owe on your first mortgage must be equal to or less than $729,750.00, you must have received your current mortgage before January 1, 2009, your payment on your first mortgage must be more than 31% of your current gross income, and you must have trouble paying your mortgage. Visit www.makinghomeaffordable.gov to determine your eligibility for this program. If you qualify for HAMP you must complete a three to four month trial period to demonstrate that you are able to consistently make the reduced payments. After you successfully complete the trial period, your mortgage will be permanently modified.
You may only modify your loan once under this program. This program is scheduled to end December 31, 2012.
Making Home Affordable Refinance Program
This program is designed for homeowners who are current on their mortgage and wish to refinance to a more affordable loan but are unable to do so because of a decrease in value of their home. If you are current on your loan and your house is not too far underwater, you can likely refinance your mortgage to a fixed-rate, low-interest loan. This is a new loan and you will be required to submit a loan application and go through the underwriting process. You will also be responsible for loan refinances fees.
If you refinance into a 15 or 30 year fixed-rate mortgage, your payments will likely not be lowered and may actually be higher. However, the advantage is that you have stability moving forward and can avoid any interest rate increases in your original mortgage. The new loan will not include any balloon payments or prepayment penalties and the interest rate will be based on the current market rate. The only amount added to your principal balance will be transaction costs. A lender cannot receive cash from this loan. When you apply for a refinance, you should recieve a Truth in Lending Statement from your bank containing your new interest rate, mortgage payment and the amount you will pay over the life of the loan. Make sure you recieve and review this statement so you understand the financial ramifications of your refinance.
To qualify for the Making Home Affordable Refinance Program, you must have a loan owned or controlled by Freddie Mac or Fannie Mae. Typically, you can only miss one payment in the last 12 months and your first mortgage must not exceed 105% of the current market value of your home. For instance, if your home is worth $200,000.00 and you owe $210,000.00 or less, you may qualfiy. You must also have sufficient income to make the new mortgage payments. This program only applies to loans in first position. The home you are trying to refinance must also be your principal resident. Visit www.makinghomeaffordable.gov to determine if you qualify for this program.
In-House Programs
If you do not qualify for any of the government-sponsored programs, you can attempt to modify the terms of your mortgage by working directly with your lender. If you have only missed a payment or two and you have not received a notice of intent to foreclose, then you likely can work out a modification with your lender.
You can use a HUD-approved housing counselor or a real estate attorney to help you negotiate with your lender.
Second Lien Modification Program
The Second Lien Modification Program, or 2MP, assists homeowners in lowering their payments for a second mortgage. If your first mortgage was modified by HAMP and your mortgage servicer is a participant in 2MP then they may offer you one or more of several options. They may reduce the interest rate to 1% for principal and interest loans, reduce the interest rate to 2% for interest only loans, extend the term to 40 years, or offer a forbearance or forgiveness of the principal.
To qualify, you must owe more than $5,000.00 on your second mortgage, your monthly payment must be more than $100.00, your first mortgage must be modified under HAMP and you must not have missed three consecutive monthly payments on your HAMP modification.
Help for Unemployed Homeowners
If you are unemployed you may be able to get a temporary forbearance for a period of three months or longer under the Home Affordable Unemployment Program or UP while you seek employment. All mortgage servicers participating in HAMP will provide eligible homeowners with this forbearance while they seek employment. Any foreclosure proceedings will be halted while you enroll in the program. If you find a job then you will be considered for HAMP. If you do not find a job, you will be considered for HAMP 30 days prior to competing your UP forebearance program.
To qualify you must currently be unemployed, not more than three months past due on your mortgage, you must not have previously received a UP forbearance or HAMP modification, you must not be receiving or eligible for unemployment benefits, your mortgage must not be guaranteed by Fannie Mae or Freddie Mac, your loan must not be an FHA or VA loan, you must reside in your home and it must be your primary residence, the amount you owe on your first mortgage must be less than $729,750.00, and your current mortgage must have been taken out on or before January 1, 2009.
Help for Underwater Homeowners
You may qualify for the Principal Reduction Alternative (PRA) if you owe more than 115% of the value of your home. If that’s the case, then your mortgage servicer is required to calculate if they are able to reduce the principal amount of your loan to achieve an affordable monthly mortgage payment. If you make all the modified payments you will be given a principal reduction over a three-year period.
These programs are not available if you have a mortgage with Fannie Mae or Freddie Mac. The home must also be your primary residence, your mortgage payment must be more than 31% of your gross monthly income, you must owe up to $729,750.00, you must have obtained your mortgage on or before January 1, 2009, and you must have financial hardship yet income enough to make the modified payment.
Keep in mind that whereas a mortgage servicer must determine if you are eligible, they are not required to grant you a principal reduction.
Home Affordable Foreclosure Alternatives Program
If you can no longer afford to stay in your home you have other options besides foreclosure. You can short sale your property or offer the bank a deed-in-lieu of foreclosure. For more information, click here.
Hardest Hit Fund
The Hardest Hit Fund (HHF) is a federal government program that helps homeowners living in states that were the affected most by the recession. You must live in one of the participating states to qualify for the program. The HHF has three different options depending on your financial situation. The HHF Unemployment Program helps unemployed homeowners pay their monthly mortgage payment for a period of time. The HHF Reinstatement Program helps homeowners who are behind on their mortgage payments catch up by funding a one-time payment. The HHF Principal Reduction Program will reduce the principal balance of a loan for homeowners who qualify for a HAMP modification. Currently, Washington does not offer HHF relief. Oregon does offer HHF Unemployment relief.
Forbearance
If you are suffering from a temporary financial hardship, such as a loss of income, a medical condition, or a natural disaster, you may be able to receive a forbearance. A forbearance is when your mortgage payments are reduced or suspended, typically up to 90 days. To qualify you must not have missed any mortgage payments prior to suffering your financial hardship.
Beware of Foreclosure Rescue Scams!!!
Under no circumstances should you sign your deed over to a third party or make mortgage payments to a third party without written approval from your servicer. Applying for all of these modification programs are free. If you are unsure how to proceed speak with a HUD-approved housing counselor or meet with a licensed real estate attorney.
Will my credit score be affected if I accept a loan modification?
Yes, your credit score may be negatively impacted by accepting a loan modification. During the trial plan, your loan will be reported as paying under a partial payment and when the loan modification is finalized it will be reported as modified. The exact impact a modification will have on your credit score depends upon many factors including your credit history and current financial standing. Typically, a modification is better on your credit score than a foreclosure or short sale.
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