As many homeowners have found it increasingly difficult to make ends meat and afford their home mortgage payments, mortgage defaults and foreclosure proceedings have risen. These homeowners have several options that may put them in a position to bring their accounts current and allow them to make their subsequent mortgage payments. One such option if a homeowner qualifies is to take part in the United States Treasury Department’s Home Affordable Modification Program.

This program is a shared debt reduction program between your lender and the government. The first step is for your lender to reduce your monthly mortgage payments including (principal, interest, taxes, insurance and condo fees) to reflect no more then 38% of your gross income. Gross income is defined as your total salary, tips, dividends and other income prior to taxes. Once the lender or bank reduced your payments to 38% of your monthly gross income, the Treasury Department will then step in and match dollar for dollar any additional reduction that the lender provides down to 31% of your gross monthly income for up to five years.

The benefit to a homeowner is rather obvious, in many cases a very large reduction in monthly mortgage payments. Additionally, should the monthly payment be reduced by 6% or more, homeowners are eligible to receive $1,000 per year for up to five (5) years, payment that goes straight towards reducing the principal balance on the mortgage loan as long as the homeowner is current on their monthly payments.

In order to encourage lenders and banks to take part in the program, the lender also receives various significant financial benefits. First and foremost is their ability to avoid foreclosing on another house that likely has no equity. The lender shares the financial burden with the Treasury Department; additionally the lender or bank receives compensation from the Government in the amount of $1,000 for each loan modified pursuant to the program. The lender will also receive up to $1,000 per year for each year the homeowner remains in the program and stays current on their new mortgage obligation. Should the homeowner be current when entering into the modification, an additional benefit is a one-time incentive payments of $1,500 to lender will be provided.

Granted, this program sounds like a fantastic win-win situation for both a homeowner in financial distress and a lender uncertain as to the borrower’s ability to stay current on their mortgage obligation. What are the requirements to take part in this program?

Homeowners:

First and foremost, the homeowners, mortgage itself must qualify. In order to qualify, the loan must have commenced prior to January 1, 2009.

The home must be your primary residence and a single family dwelling of no more then 4 units. More specially, the home may not be investor owned, it may not be vacant. The homeowner will need to prove they live in home though a tax return or a utility bill.
The payoff on the primary mortgage must not exceed: 1 Unit: $729,750, 2 Units: $934,200, 3 Units: $1,129,250, or 4 Units: $1,403,400
A homeowner must have a current or imminent financial hardship.
Loans can only be modified once under this program, as such, if you have modified once, you will not be able to go back to the well a second time.
The home must have an appraised or assessed value not older then 60 days.
The borrower will need to verify their income by submitting an IRS form that allows the lender to request taxes directly from the IRS. Additionally, the borrower will be required to submit the two most recent pay stubs.
Borrowers must also represent to the lender that they do not have enough money in the bank to stay current.
If a homeowner’s overall debt is greater then 55% of their gross monthly income, you will need to first take part in a credit counseling session with an HUD- approved counselor and receive a certificate of compliance.

Lenders:

Participating lenders are required to consider all eligible loans under the program guidelines unless there is a pre-existing agreement which expressly states otherwise. For any modification request originating from a homeowner in default, a net present value of cash flow test will be applied. This test essentially looks at whether a modification will increase the homeowner’s cash flow should a modification be granted.

How does the Process work?

The process starts by providing your lender with all the required documentation and information. This is a step that can be very time consuming and is a prime reason to work with a licensed attorney in your area. Once the bank or lender has confirmed they have received your full package, and has reviewed the package, a loan negotiator will be assigned to the case. The lender then must start by determining if there are any missed loan payments in. If so, the lender may capitalize the late payments.

The next step is for the lender to determine 31% of the homeowner’s gross income. Once this income level is determined, the lender must follow a 3 step process to reduce the monthly payment to that 31% amount.

Reduce the interest rate as low as 2%.
If the rate reduction does not bring the mortgage payments down to the 31% mark, then the lender is to extend the duration of the loan to 40 years from the date of the modification. It should be noted that a full 40 year extension may not be required, but the lender only needs to extend to the point where the payment reaches the 31% watermark.
The next step is for the lender to forbear principal. Should interest forbearance be used, no interest will accrue on the forbearance amount. If there is a principal forbearance amount, a balloon payment of that forbearance amount will due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance.
If a homeowner has a junior lien (second mortgage, equity line, etc) and the first or primary mortgage is modified through the program, then and only then can the junior lien be modified. The Government is offering certain incentives to modify junior liens in this timeline.

The Loan Modification Approval Process

The first step in the approval process is for the homeowner to take part in a 90-day trial period based upon the new loan modification monthly payment. The borrower must remain current for the first three (3) months or 90-day period.

If the borrower’s total monthly debt exceeds 55% of their gross income, the lender or bank must notify the borrower in writing of HUD approved credit counselors. The borrower must complete a credit counseling program and obtain a certificate. If the homeowner’s debt does not rise to the 55% level, the forgoing is not required.

The lender must waive any late fees upon completion of the 90-day trial period.

The investor may not require the borrower to contribute cash

What about homes in foreclosure?

Subsequent to a modification agreement being entered into by the homeowner and the lender, any foreclosure action will be temporarily suspended during the 90-day trial period, In the event that the Home Affordable Modification or alternative foreclosure prevention options fail, the foreclosure action may be resumed. However, pursuant to the Affordable Home Modification Program, should the modification fail, banks and lenders are required to consider other programs before foreclosure including but not limited to short sales and deed in lieu of debt.