Rules for Mortgage Modificatio Set
Here is the best Explanation that I have found: Rules for mortgage modification set By
Here is the best Explanation that I have found:
Rules for mortgage modification set
People with unaffordable mortgages now have one set of rules, applicable nationwide, to
determine whether they can get lower monthly payments.
Folks who can afford their mortgages but need help to refinance to lower rates don't get a lot
The Obama administration's housing plan encourages lenders to modify the mortgages of
homeowners who can't afford their monthly house payments because of hardship. The
definition of hardship is loose and includes: lost income, increased expenses, payment shock
from an adjustable-rate mortgage, and "other indications of being at risk of default."
Qualified homeowners would keep their current loans, but the payments would be reduced to
31 percent of before-tax income. Most borrowers would see their payments rise after five
The aim of the Making Home Affordable program is to "prevent the destructive impact of
foreclosures on families and communities," according to the Treasury Department.
Two weeks ago, the Obama administration announced the outlines of the foreclosure
prevention program, which then was dubbed theHomeowner Affordability and Stability Plan.
Now the name is shorter and the details are longer. The guidelines for the mortgage
modification plan fill 17 pages and explain, step by step, who is eligible for modifications and
how those monthly house payments are reduced to 31 percent of income.
Here are some qualifications to be eligible for a loan modification:
•It has to be the homeowner's primary residence, and must be occupied and
•The balance on the first-lien mortgage can't be more than $729,750 for a
•It's OK if foreclosure proceedings already have begun or if the borrower is
suing the lender.
If the borrower qualifies, then the mortgage servicer figures out what it will take to decrease
the monthly house payments to 31 percent of income.
Here's how that shakes out:
Under this plan, the house payment includes principal, interest, taxes, homeowners
insurance (including flood insurance), and homeowners association or condo fees. It
excludes mortgage insurance premiums.
Past-due interest, taxes and insurance are added to the mortgage's balance. Late
fees must be waived.
As a first step, the lender drops the interest rate as low as 2 percent. If that's
sufficient to bring the payment down to 31 percent of income, then that's the rate.
For example, if cutting the interest rate to 4 5/8 percent drops the payment to the
31 percent threshold, the rate doesn't go any lower.
If dropping the rate to 2 percent doesn't do the trick, the next step is to extend the
term of the loan up to 40 years. It doesn't have to be 40 years; it's all good if a 2
percent rate over a 37-year term brings the monthly payments down to 31 percent
If a 2 percent rate and a 40-year term don't get the payment down enough, the third
step is to "forbear principal." This means that the borrower owes the same amount
as before but pays interest on only part of the mortgage balance. For example,
someone might owe $300,000 but pay 2 percent interest for 40 years on $250,000.
All $300,000 must be paid back if the homeowner sells the home or refinances the
Guidelines for consistency
Those last three bullet points are somewhat misleading because the lowered interest rates
don't last for the entire term of the loan. They last only five years. After that, the lender is
allowed to raise the rate by 1 percentage point per year until the rate is close to the prevailing
rate during the week that the modification was approved.