Loan Modification

Loan Modification is the process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender, with the goal of an interest rate and/or principal reduction.

There are various loan modification programs. One of the most well known is the HAMP program, described below. Other programs are lender and/or investor specific, in which the respective entity has its own guidelines to modifying a loan. Please note, not everyone qualifies for a loan modification, but the following HAMP guidelines will provide you an idea as to the criteria for a loan modification.

Home Affordable Modification Program

According to Fannie Mae, the Home Affordable Modification Program (HAMP), is designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use. Visit makinghomeaffordable.gov for full information.

Eligibility Criteria
Borrower eligibility is based on meeting specific criteria including:

Borrower is delinquent on their mortgage or faces imminent risk of default ;
Property is occupied as borrower's primary residence;
Mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.

Monthly payment adjustment
After determining a borrower's eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower's total pretax monthly income:

First, reduce the interest rate to as low as 2%;
Next, if necessary, extend the loan term to 40 years;
Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.

Note: Servicers may elect to forgive principal under HAMP on a stand-alone basis or before any modification step in order to achieve the target monthly mortgage payment.

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