When taking out a mortgage loan, you make a promise that you will make payments of the interest and principal until the loan is paid in full. However, not all loans go smoothly. Due to emergencies in your life or a turn of the economy, sometimes you find yourself unable to pay your mortgage as promised. When this happens, you need to consider a loan modification. A loan modification is simply a change to your current loan so that you can continue to meet your loan obligations and keep your home.
How Are Loans Modified?
If your mortgage lender agrees on a modification, your loan will change in a way that will help you make your payments more easily. The purpose of a loan modification is to get your monthly payment to no more than 31% of your monthly gross income. To do this, there are many modifications that can be made. Here are the most common:
- Change in interest rate: For many people, lowering the interest rate is enough to lower payments to a more manageable size. In addition to lowering rates, a lender may change the interest to a fixed rate if you currently have an Adjustable Rate Mortgage (ARM) or change the way the rate in the ARM is computed.
- Reduce the principle: Another way to lower your monthly payment is to reduce the principle owed. A lender can decide to “forgive” part of the principle, lowering the amount you owe.
- Reduce or eliminate fees: If you have been having troubles for a while, there is a good chance that you’ve racked up fees and penalties for being late with your payments. During a loan modification, your lender can choose to reduce or even eliminate some of these fees to help you get back on your feet.
- Lengthening the loan: Your lender may decide to give you more time to pay off your loan. Changing a loan from 20 years to 30 years can substantially reduce your monthly payments.
- Changing the monthly payment: Sometimes lenders put a cap on the amount you will be required to pay each month based on a percentage of the household income.
Finding The Right Loan Modification
If you are late, in default, in bankruptcy, in foreclosure, or foresee that you are going to have problems in the near future, you may have the option to modify your mortgage loan. There are many different programs available for loan modification, and each change is handled at the discretion of your lender.
The sooner you contact your lender, the more opportunities you have to find a loan modification program that suits you and your needs. To get started finding the right loan modification program, you will need to do the following three things.
- Collect your current financial information. You will need to show your lender your current income and your current expenses. If you’ve had a major change in income, providing proof of this change will be helpful. To qualify for most loan modification programs, at least one person in the household must have continuous income. Even if this person is not on the original loan, bring proof of this income to your meetings with potential lenders.
- Provide current mortgage information. Make sure you bring your current mortgage information. If you cannot find your original documents, bring a current mortgage statement that has your account number.
- Get some free advice. The Housing and Urban Development (HUD) has nonprofit agencies that can give you advice about your situation. Start there to determine what loans will work for you. In addition to knowledge about specific loan modification programs, they can also help you create a plan of action, give you some specific budget suggestions, and help you talk with your lender.
HAMP: The Most Common Government Loan Modification Program
The most common loan modification program is the HAMP (Home Affordable Modification Plan). The HAMP specifically can lower your interest rate, lower the principle due, and lengthen the loan.
To qualify for the HAMP, you must have a legitimate reason for not being able to make your mortgage payments. Although you do not have to currently be behind in your payments, you need to be able to show that making them is a hardship for you and your family.
In addition to actual hardship, your loan must have closed before January 1, 2009, the amount you owe cannot be over $729,750, and the property must be in good condition. Finally, you will have to have sufficient income to make the modified payments. At this time, the HAMP program will end December 31, 2016.
If You Don’t Qualify For HAMP
If you need a loan modification, but do not qualify for an HAMP, what can you do? There are many other loan modification programs available.
- VA Loan: If you have a VA Loan, call your Loan Guaranty office. Loan specialists can help you discuss ways to save the loan.
- Veteran with a Conventional Loan: If you are a Veteran with a conventional loan, you may have the option to refinance to a VA guaranteed loan for up to 100% of the value of the property.
- State Government Programs: Some states offer loan modification programs. You can find them by searching the internet using your state’s name and the term “home modification program.”
- City Government Programs: Some cities also offer loan modification programs. Once again, search your city and the term “home modification program” in an Internet search engine.
- Individual Bank Programs: Some banks have their own loan modification programs with their own set of qualifications. The best place to start is with your current lender.
