A mortgage modification is the alteration of a current mortgage to a different set of terms whether it is the interest rate or the length of the loan or both. On a general basis, any loan can be modified if both parties agree to it. These modifications may be due to the borrower being late, in default or have actually gone into foreclosure. It could also be done due to a reduction in principal, a lowering of interest rates and other reasons. Many lenders will do a modification based on the fact a borrower can make a lower payment and become a performing loan versus proceeds from a foreclosure.
There are voluntary and mandatory modifications. The state or federal government may actually provide incentives for lenders to do modifications in a voluntary program while mandatory programs require lenders modify mortgages within a certain criteria concerning the borrowers, properties and loan payment histories.
In 2009 the Federal Government began a new program named the Home Affordable Modification Program (HAMP) and set out to rescue several million homeowners currently at risk of foreclosure by working with their lenders to lower monthly payments. The program being done in partnership with most loan agencies in the nation and is now recognized as the standard practice in the industry.
To qualify for the program homeowners must adhere to the following:
- Original loan must have began on or before January 1, 2009
- First lien balance cannot be over $729,750
- Borrowers must document income and sign an affidavit of financial hardship
- Modifications can be done until December 31, 2012
- Owner occupancy must be verified, no investor-owned or condemned properties
There are certain guidelines, which are spelled out in the agreement. Some of these would be reduction of the interest rate (there is a floor of 2%), a possible extension of the term of the loan up to a maximum of 40 years, principal forbearing if needed. The monthly payments must include principal, interest, taxes, insurance and flood insurance, homeowner’s association and/or condominium fees. When monthly income is considered it must include wages, salary, overtime, fees, commissions, tips, social security, pensions and all other income.
The loan servicers must follow a sequence of steps to make certain that monthly payments are no more than 31% of borrowers gross monthly income (DTI – debt to income ratio). Homeowners who make their new payments on time will be eligible for up to $1,000 of principal reduction payments each year for up to five years.