How Loan Modifications Work

The government’s mortgage modification plan, Making Home Affordable, had a weak first year, but that doesn’t mean homeowners shouldn’t try to take advantage of it. The plan consists of several programs that aim to make mortgages more affordable, including the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP).

Here’s how the modification programs Work:

Home Affordable Refinance Program

HARP helps struggling homeowners refinance into an affordable loan, especially those who do not qualify for a regular refinance because their current loans are underwater (the value of their homes has fallen below the value of their loans).

Basic HARP qualification requirements include:

  • The mortgage is for a primary residence;
  • The loan is up to 125% of the home’s value and is backed by Fannie Mae or Freddie Mac;
  • Mortgage payments are current and income is sufficient to afford the new payments.

Home Affordable Modification Program

HAMP modifies your existing loan, changing the terms to make it more affordable. This program is mandatory for Fannie Mae- and Freddie Mac-backed loans, but is not limited to them. HAMP offers servicers incentives for modifying any eligible mortgage.

Servicers must evaluate your eligibility for HAMP before starting foreclosure, and if you are eligible servicers must make a modification offer. Once in a trial plan, you are protected from foreclosure as long as you make your trial payments.

Factors considered for HAMP eligibility include:

  • Loan is on a primary residence;
  • Current mortgage payments exceed 31% of gross income;
  • Sufficient current income;
  • Value of loan after modification: If this is greater than before, the servicer is required to offer a HAMP modification. If not, then the decision is up to the servicer and owner of the loan.

In order to reduce payments to 31% of gross income, your servicer may:

  • Lower the interest rate: government-provided subsidies may bring it as low as 2%;
  • Extend the loan length;
  • Defer some principle: you will still owe the deferred amount, but you repay it only when either the rest of the loan has been paid or you sell the property;
  • Forgive a portion of the loan: this is optional, but Bank of America announced in March that it will consider principle reduction before interest rate reduction for some customers.

Changes to the modification programs

HAMP had problems early on and made only about 31,000 permanent modifications through early December. In response to homeowner complaints, program representatives worked with servicers to ensure they make every effort to obtain all necessary paperwork and then make timely decisions. More than 110,000 trials have now been made permanent.

Here are some key changes intended to make it easier for eligible homeowners to get help:

  • HARP was expanded to cover loans up to 125% of a homes value, up from the original 105%;
  • HARP, originally set to expire on June 10, 2010, has been extended until June 30, 2011;
  • Starting June 1, 2010, you must submit all needed documentation for HAMP before your eligibility will be evaluated. This should prevent people who do not qualify from entering the trial period and later being denied permanent modifications;
  • HAMP income verification will require submitting two pay stubs and authorizing access to tax returns instead of submitting a W-2;
  • HAMP now covers second mortgages. Bank of America, Wells Fargo, J.P. Morgan Chase and Citigroup have all signed on to this program as of March 25, 2010.

Not all mortgage modifications are going through HARP and HAMP, so even if you do not qualify for either, your servicer may still be able to help you. The government is currently scrutinizing lenders closely regarding their failures to work with some homeowners to make modifications work, so do not give up if you are having trouble. Hang in there as long as you can and contact your local HUD representative for help.