To mod or not to mod: that is the question

January 12th, 2011

By now three to four million homeowners were to be assisted by the government's Home Affordable Modification Program, or HAMP. But as of now, only a few hundred thousand homeowners have been successful in a HAMP modification. If you have been considering a mortgage modification here are some issues for you to consider. In your decision making process use the free mortgage calculators to determine monthly payments for various scenarios.

Qualification

Just because you are upside down on your mortgage does not mean that you qualify for a home loan modification. Each lender has its own qualification process for a mortgage modification, including what your income is to support a mortgage payment. If your current income is sufficient to support your current mortgage payment chances are very high you will not be approved for a modification of your mortgage.

If your current mortgage payment is greater than 31 percent of your income you may be eligible for a modification, but that is no guarantee. A home affordability calculator can help you determine what the mortgage amount may be if your modification is approved at 31 percent of your current income and current mortgage rate.

When calculating your income you will need to provide all current and prior year's income documents as well as attest to their accuracy. At this stage of the process many applicants have been denied in the modification process, both from lender programs and from HAMP.

Payments

Do not expect your modification process to go quickly, or smoothly. Be prepared to provide all required items and to complete all necessary forms as soon as requested. Be prepared to provide the same information again. And again. When you start the process be sure to ask whether your lender will require you to keep making your mortgage payments.

If your mortgage modification is not approved, you will be responsible for the payments you have not made, plus penalties and interest. If you are not making the full payment, consider setting money aside in a special bank account to ease the hurt should you need to make restitution for missed payments.

Trial period

Once your paperwork has been processed you may be offered a trial period of 3 to 6 months to make payments on your modified payment schedule, either based upon a lower interest rate, a lower principal balance and/or a longer mortgage term. If this is the case be clear with your lender what to expect if after the trial period you are not approved for your mortgage modification.

Stories abound in the media of borrowers who started the modification process and after several months were denied a modification and were sent a bill for back payments, penalties, interest and missing payments on their impound accounts. If this happens to you, will you have the funds to pay what you may owe?

Lenders feel the heat

With a significant percentage of approved mortgage modifications having reverted to default status and eventual foreclosure, many lenders have become even more particular about approving modifications. Federal agencies have pressured lenders to put more borrowers into the HAMP program, which is set up to use TARP funds to relieve some of the lenders losses, but such pressure has not resulted in more lenders using the HAMP program. The primary reason is the recent history with borrowers going into modification agreements and later defaulting, costing the lender a duplication of fees and expenses on a mortgage that has defaulted twice.

If you are considering a loan modification for your mortgage be sure to investigate all your alternatives, including a Make Home Affordable refinance through Fannie Mae or Freddie Mac or a Streamline Refinance of your FHA mortgage. Mortgage calculators can assist you with comparing any of these programs.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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