A home loan modification is an effective way to keep your home from going to foreclosure. Unlike a refinance, where you get a new loan, a loan modification is a modification to an existing mortgage where your lender agrees to either extend your loan term, reduce your interest rate, forgive some of your debt or add the arrearages to the back end of your loan.

Eligibility
A homeowner who is in default on their mortgage payments or about to go into default or pre-foreclosure may be eligible for a loan modification. The lender is most concerned with whether the borrower has the financial ability to make the new mortgage payments. The borrower must also show a financial hardship which can be various reasons such as loss of income or reduced income, a divorce, death in the family, or property value declines. The modification works best on variable interest rate loans that can be reduced at least 1 point.

Home Loan Modification Process
The government’s new regulations under the new Home Affordable Modification Program should now speed up and streamline the loan modification process. Prior to the new plan, it was taking as long as 60 to 90 days or more to get a mortgage modification application approved. The Treasury Department has released the new guidelines for loan modifications under the Home Affordable Modification Program which are as follows:

• Only loans that were originated on or before January 1, 2009 will be eligible.
• Only owner occupied properties are eligible. The loans must be first lien loans with unpaid principal balances up to $729,750. Higher limits are allowed for owner-occupied properties with 2-4 units. No investor properties, vacant or condemned properties will be eligible either.
• Borrowers must show proof of income consisting of their last two paycheck stubs, their current bank statement, their last most recent income tax return and their hardship letter explaining why they can no longer make their current monthly mortgage payment.
• Incentives will be given to lenders and servicers to modify their borrowers who are current on their payments, but at risk of being in default.
• Mortgage modifications starting now will be effective through December 31, 2012. Loans can only be modified once under this program.
• Participating servicers will be required to service all eligible loans unless the servicing contract prohibits this.
• The servicer must use the net present value of cash flow test with and without modification. If the net present value of the expected cash flow is greater with a modification, then the servicer must issue a modification unless the borrower has committed fraud.
• The conditions of the modification must occur as follows: Interest rate must be reduced to a rate floor of 2%, then the term can be extended to a maximum term of 40 years, and if necessary a forbearance of principal or refinancing may be issued instead of a modification.
• All loan servicers must enter into agreements with the Treasury Department prior to December 31, 2009.

Troubled homeowners can contact their loan servicer or lender directly or sign an authorization letter authorizing their attorney, mortgage broker, housing advisor or other representative to negotiate their loan modification on their behalf and stop foreclosure on their house.

The negotiator will present an offer to the borrower and the borrower has the opportunity to counter the offer or accept it. The borrower must have sufficient income to be able to pay the new mortgage payment. So if you do not have any income, you will not qualify for a loan modification.

Be sure to visit our loan modification category for more information.