If you're experiencing financial hardship and fear you'll lose your home, you can modify your mortgage terms to lower the payment. Most banks have loss mitigation departments just for borrowers having money troubles. The Department of Housing and Urban Development and the Treasury Department streamlined the modification process in 2009 for all lenders, including several banks.
Loan modifications only go to people who really need them. If you're not already behind on the loan, your bank will analyze your financial situation to see if it's likely you'll default. That may happen if, for example, the adjustable interest rate of the loan will increase to a payment you can't afford. Applicants for the federal Home Affordable Modification Program (HAMP) put their hardship in writing as part of the application.
The bank will review your debt-to-income ratios to see if you can afford the new payment. The front-end ratio compares the total housing payment to your gross income, while the back-end compares your recurring expenses to gross income. You need to get the loan principal and interest payment reduced by at least 10 percent under the HAMP. The front-end ratio can't be less than 25 percent or exceed 42 percent. The DTI ratio includes the loan's principal, interest, taxes, homeowners insurance and homeowners association fees. The guidelines exclude mortgage insurance from the DTI ratio.
The loans have set limits based on the property size. As of 2012, a one-unit property could get as much as $729,750. It was $934,200 for two units; $1,129,250 for three units and $1,403,400 for four. All of those were for loans made before Jan. 1, 2009. If you're approved for the HAMP, you may qualify for the Second Lien Modification Program through Making Home Affordable. That can help you cut second mortgages, home equity loans or lines of credit.
The home may be used as your primary residence, a second home or investment property. As of mid-2012, the HAMP applied to delinquent loans on rental property up to four units. If the property is vacant, you'll have to prove you plan to rent it after the modification. The bank requires documented proof of rental income, such as Schedule E of your tax returns, cancelled rent checks and a lease agreement.
- Making Home Affordable: Home Affordable Modification Program: Eligibility
- HUD: How to Avoid Foreclosure
- HUD: Mortgagee Letter 2012-22: Revisions to FHA’s Loss Mitigation Home Retention Options
- Making Home Affordable Admin: HAMP: Effective: June 1, 2012
- Making Home Affordable: If You Have a Second Mortgage
- Making Home Affordable: Understanding Program Guidelines
K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.