Loan Modification Programs

There are many different loan modification programs available in order to change the terms of a mortgagor’s loan outside of the original terms of the contract. Often, these loan modification programs try to change at least one of these terms:

• Reducing the principal of the loan

• Reducing late fees or penalties

• Lengthening the term of the loan

• Reducing the interest rate of the loan

• Adjusting the floating rate calculations

• Changing the interest rate to a fixed rate from a floating rate

• Temporary postponing of payments

One of the loan modification programs available is the Homeowner Affordability & Stability Plan, which was set up under the Financial Stability Act of 2009. The purpose of the program is to help up to 8 million eligible homeowners that are at risk of foreclosure keep their homes. The program was created under the Financial Stability Act of 2009. In order to be eligible, a homeowner must meet these requirements:

• Their loan began before January 2009.

• They have an unpaid balance up to $729,750 (with higher limits for multi-family homes)

• The total of the payments must exceed 31% of the gross monthly household income. These payments include principal, interest, homeowner's insurance, and property taxes.

• There is documentation and proof of income, a signed IRS 4506-T, and a signed affidavit of financial hardship.

• Property owner must live in the home.

• Lenders would receive incentives to provide loan modifications for at-risk borrowers who have not missed payments even when at imminent risk of default.

• The borrower must be at most 5% underwater.

• Loan modifications can only occur once and will only happen until the end of 2012.

With these loan modification programs, homeowners can help by:

• Share the reduction costs with the lender, potentially lowering the monthly payments down 31% debt to income ratio.

• Give servicers who provide loan modifications $1,000 for each modification along with incentives on still-performing loans of $1,000 annually.

• Reduce the principal for homeowners that make payments on time up to $1,000 per year for up to five years.

• Create one-time bonus incentive payments of $1,500 to lender as well as $500 to servicers for loan modifications made while a borrower is not behind on payments.

• Create incentives for getting rid of additional liens on loans modified under this program.

There are also second lien loan modification programs that use a lender who has participated in the Home Affordable Modification Program. These loan modification programs do not necessarily offer a permanent modification with good terms, but are required to offer one. The requirements for eligibility are the same as the government loan modification programs.

NEXT: Loan Consolidation