A Loan Modification is an option for a homeowner who has experienced or is experiencing a hardship, such as a decrease in income or an increase in their monthly house payment. This option is an alternative to a short sale, a deed in lieu of foreclosure, preforeclosure or foreclosure. Under President Obama’s Making Home Affordable Plan, there are some general guidelines which determine if a homeowner is eligible for a loan modification. First, the homeowner must currently reside in the property. Investment property and second homes are not currently eligible for loan modifications. Secondly, your first mortgage amount must be less than $729,750.00 and be originated prior to January 1, 2009. Your monthly principal, interest, taxes, insurance (PITI) and homeowners association fees must be greater than 31% of your current gross monthly income. These guidelines only apply to the Making Home Affordable Plan and usually differ from those offered by the lender, servicer or mortgage holder.
When the homeowner requests a loan modification, some general financial information is gathered by the mortgage company. If the homeowner qualifies based on their verbal representation of their current financial situation, the mortgage company will issue a trial loan modification with a reduced monthly payment. Typical trial modifications last 3 to 9 months depending on the financial institution and their ability to navigate thru the thousands of loan modification files they are reviewing.
During the trial loan modification, the homeowner will be asked to provide supporting documentation as to their financial ability to continue making their reduced mortgage payments. This documentation may include tax returns, pay stubs and bank statements. Once this information is reviewed and approved by the mortgage company, a permanent modification package is presented to the homeowner indicating their new monthly payment. This lower monthly payment could be calculated by reducing the interest rate on the loan, a longer term of the existing loan, and possibly an increased principal balance.
Although the loan modification process and qualifications vary from each financial institution, these guidelines are intended to provide a general description of the loan modification process. This is by no means considered legal advice. The homeowner should consult with an attorney or tax consultant if they are considering a loan modification.
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