Loan modifications became popular after the housing market crashed in 2007 and the economic crisis began. Lenders restructure mortgages on a permanent or temporary basis to avoid foreclosure. Modifications "improve borrower affordability, increase the probability of loan performance, preserve communities and increase the value of the loans," says the Federal Deposit Insurance Corporation. The government has streamlined the modification process for more than 100 lenders, while other lenders set alternate modification guidelines.
The U.S. Treasury and the Department of Housing and Urban Development oversee the Home Affordable Modification Program, which restructures loans made to borrowers before Jan. 1, 2009. HAMP assistance originally was available only for those with mortgages tied to owner-occupied homes, but that changed in the summer of 2012, and as of December 2012 borrowers with investment property or second homes also qualify. Making Home Affordable, the umbrella program that covers HAMP, also offers other foreclosure-prevention assistance.
You can qualify for HAMP assistance if your housing payment uses up more than 31 percent of your gross income. You can't owe more than $729,750 on a one-unit home; $934,200 on a two-unit building; $1,129,250 on a three-unit property; or $1,403,400 on a four-unit property. Your property can't be condemned or subject to eminent domain. If you have a second home, you must rent it out to qualify. If you live in the home in question, you must be either behind on payments or in danger of falling behind. If you do not occupy the home, you must be delinquent on payments.
Lenders may offer an alternate loan modification under their own terms for borrowers who don't qualify for HAMP assistance. For example, Freddie Mac, which owns or guarantees loans, offers the Standard Modification Program. You may qualify for it if you recently have been rejected for HAMP assistance or if you recently have defaulted on a loan through that program. The Federal Housing Administration, a government insurer of loans, also offers modifications. An FHA loan may qualify for an FHA-HAMP or HUD's regular mortgage modification program. To qualify for HUD's modification, which extends your loan term to lower the payments, you must have recovered from you financial hardship.
You can get another type of HAMP for a second mortgage loan if your first loan qualified for the permanent HAMP. Under the Second Lien Modification Program, you can reduce or eliminate the smaller second loan. This includes home equity loans and lines of credit.
- CNN Money: How A "Perfect Storm" Led to the Economic Crisis
- FDIC: FDIC Loan Modification Guidance Non-Owner Occupied (“NOO”) Single Family Residential (SFR) Loans
- Making Home Affordable: Contact Your Mortgage Company
- Making Home Affordable: HAMP
- Freddie Mac: Standard Modification: Mortgage and Borrower Eligibility
- HUD: How to Avoid Foreclosure: Mortgage Modification
- Making Home Affordable: Second Lien Modification Program (2MP)
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.