What are the Qualifications for a Loan Modification?
As a general rule, there are no qualifications per se for a borrower to ask their lender to modify the original terms of the agreement for any given reason. However, more often than not, the lender will flatly deny the request unless there is a pressing financial problem or crisis that the borrower can document and the lender agrees that loan modification is a better option than foreclosure. General loan modification notwithstanding, there are very specific qualifications that have to be met if the lender wants loan modification through the federal government’s Making Home Affordable (MHA, www.makinghomeaffordable.gov ) program.
The loan modification portion of the MHA program, known as Home Affordable Modification Program (HAMP), has five very specific qualifications that must be met by the borrower. These are as follows:
(1) The property in question has to be the borrower’s primary residence, as defined by the U.S. Department of Housing and urban Development (HUD) and the Internal Revenue Service (IRS). That is, the borrower cannot seek loan modification through HAMP for secondary properties, vacation homes, and other real estate that is not their primary residence.
(2) The amount owed on the property has to be equal to, or less than, $729,750. The idea here was primarily to prevent people that purchased homes well outside of their price range and/or the very wealthy from taking advantage of HAMP in order to keep a luxury mansion or country estate. The view is that if the borrower could afford to get into a home worth more than this amount, then they probably should not receive government assistance.
(3) The third qualification is that the borrower has to be able to show that they are facing significant difficulty meeting
their monthly mortgage payment due to changes that happened since the original mortgage agreement was entered into. This usually means that: (a) the monthly mortgage amount has adjusted sharply higher; (b) the household monthly income has significantly declined; or (c) that the borrower has faced some sort of unforseen financial hardship.
(4) The mortgage had to have been finalized prior to January 1, 2009 in order to qualify for any assistance from MHA. The idea here is simply that by January 1, 2009, the real estate market had already collapsed and anyone that entered into a new mortgage since that time should have known what they were getting into. The primary purpose of MHA is to help those that got taken in during the era of easy credit and over inflated property values.
(5) The fifth qualifying condition that must be met is that the borrower has to be paying more than thirty-one percent of their monthly gross (not net) income on their mortgage payment. The HAMP is strictly structured to reduce the monthly mortgage payment to thirty-one percent of the borrower’s monthly income; therefore if the borrower is already paying a smaller percentage, there is nothing HAMP can do to further reduce this amount.
Failure to meet any one of the foregoing five conditions automatically excludes a borrower from taking advantage of the HAMP aspect of the MHA program, though other alternatives may be available. The MHA website mentions a number of alternatives that may be sought after if one fails to qualify for HAMP, such as loan forbearance, repayment plans, pre-foreclosure sales, and special relief available to members of the armed forces.
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