Last month, I started a two-part series addressing the federal government’s Making Home Affordable (MHA) program, and presented a summary of its first component, the Home Affordable Refinance Program (HARP).
In this issue, I’ll present highlights of the Home Affordable Modification Program, also known as HAMP. Both programs are designed to help struggling homeowners by making their monthly payments more affordable through loan restructuring.
Should you happen to be a borrower with an “underwater” mortgage (your home is worth less than what you owe), and have also missed payments, you may qualify for HAMP. To do so, you must demonstrate “financial hardship that puts your mortgage in imminent danger of default.”
But remember that HAMP is not a refinancing program. It is a change to the terms of your mortgage that lowers your payments for up to 5 years. Beginning in the 60th month, the mortgage rate may begin to increase, but by no more than 1% per year until it reaches the “market rate at the time the modification agreement is prepared,” according to the MHA website.
Are you eligible for a Home Affordable Modification? If you can answer “yes” to each of the following questions, you’re on your way…
• Is this your primary residence?
• Is the amount you owe on your first mortgage less than $729,750?
• Are you having trouble paying your mortgage? For instance, have you had a significant increase in your mortgage payment, a reduction in your income since you obtained your current loan, or have you had a hardship that’s increased your expenses (e.g. medical bills)?
• Did you obtain your current mortgage before January 1st, 2009?
• Is the payment on your first mortgage (including principal, interest, taxes, insurance, and homeowner’s association dues, if applicable) more than 31% of your current gross income?
If a borrower’s eligibility is confirmed, the lender then calculates how much of an interest rate reduction is necessary to lower the total monthly mortgage payment to 31% (or less) of a borrower’s total pretax monthly income.
While the rate may be dropped to as low as 2%, it still may not be enough to reach the 31% criteria. If so, the lender has at least two other options for modifying the loan including extending the loan term up to 40 years, and/or deferring a portion of the principal by delaying payment to a future date.
If a lender determines that a modification is possible, it will exercise the “net present value” test to assess whether a loan modification will provide the lender with a better financial outcome than a foreclosure.
In utilizing the test, the lender calculates how much it would cost to modify the borrower’s mortgage to a debt-to-income ratio between 31% and 38%. Participating lenders are required to offer the modification if the cost to modify is less than the cost to foreclose.
Borrowers pursuing a modification should expect to provide income documentation including pay stubs and Tax Returns. You will also be asked to sign an Affidavit of Financial Hardship, and to provide recent bank and investment statements showing you don’t have sufficient assets to make the regular monthly payments.
HAMP mandates that in order to qualify for a permanent modification, borrowers must first complete a 90 day Trial Period. Provided the borrower maintains timely payments during this period, the lender then reassesses the borrower’s situation to see if he or she still qualifies for the long-term modification. Assuming this is the case, the modification would be made permanent and with any luck, a homeowner maintains his home.
Despite its intentions, the program has been subject to much scrutiny and criticism, primarily because it hasn’t reached nearly enough homeowners seeking mortgage relief, and the speed at which approvals have been offered.
To address these concerns and to simplify and standardize the application process, the Treasury Department announced enhancements to the program late last month. The changes are aimed at providing temporary mortgage assistance to unemployed borrowers and those who currently have an FHA loan.
For the unemployed, meeting the new eligibility requirements means their mortgage payments can be reduced to an “affordable level” for a minimum of three months, and up to six months for some borrowers, while they look for a new job. If no new job is found before the temporary assistance period ends, or if a job with less income than previously earned is obtained, such borrowers will be evaluated for a permanent HAMP modification or the Alternatives to Foreclosure program.
In addition, lenders will now be required to respond to borrowers within 30 days of application to inform them whether they have been approved, denied or incomplete. If the application is incomplete, lenders must inform the borrower and list the additional documents to be provided.
The new guidelines apply to all trial loan modifications initiated after June 1, 2010, although lenders may adopt them at any time prior to that date. Overall, HAMP is scheduled to expire on December 31, 2012.
If you find yourself in this unfortunate position, seek advice and take action now. The clock is ticking.
For more information, check out the MHA website at makinghomeaffordable.gov.
Chris Beagle is a Senior Loan Officer at Fairway Independent Mortgage Corporation. For more information, contact Chris at 302-260-7090.