Saving your home with a loan modification

Many homeowners face a severe crisis, such as divorce, severe health issues, or family death, and are unable to make their home mortgage payments. Unfortunately, regardless of the reason, if you do not meet your contractual loan obligations the lender has the legal right to foreclose on your home.

One option to stave-off foreclosure is to request loan modification from the lender. If approved, the loan modification modifies the terms of the original mortgage agreement, allowing you time to improve your financial position and save your house.

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Options for a loan modification

Although loan modification options are at the discretion of the lender or the specific program in which you might qualify, several options to investigate include:

  • Reducing the late fees and other penalties
  • Capping the monthly mortgage payments to a percentage of your household income
  • Reducing the principal owed
  • Reducing the interest rate charged for borrowed funds
  • Changing a floating interest rate to a fixed interest rate
  • Increasing the amount of time to repay the loan
  • Qualifying for a mortgage forbearance program

Do I qualify for HAMP and HARP?

In 2009 the Federal Government created the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP). Both programs have been extended (as of now) through 2016 and provide financial relief for certain borrowers who continue to have difficulty paying their home mortgage or refinancing their home loan.

HAMP requires banks who received bailout money from the federal government to provide certain types of mortgage modifications if a borrower's loan is backed by Fannie Mae, Freddy Mac, or who have loans serviced by certain mortgage companies.

Borrowers who qualify for HAMP may be allowed to lower their monthly mortgage payments, lower their interest rates, and receive forbearance or forgiveness for some of the remaining money owed for the house.

HARP, on the other hand, allows qualifying homeowners, who have loans through Fannie Mae or Freddie Mac and little equity in their home, to refinance the loan. By refinancing the homeowner may be able to get a lower interest rate, a fixed rate mortgage, and a shorter loan term, all without a minimum credit score.

Can I qualify for HAMP?

To qualify for HAMP you must be in danger of a loan default and you must meet the federal guidelines for the program. For example, your loan must have been initiated prior to January 1, 2009, you must owe less than $729,750 on your mortgage, and you must meet certain income restrictions. You are also required to prove you have a documented hardship, which can include a divorce, severe health condition, or job loss.

Can I qualify for HARP?

To qualify for HARP you must be current on your home mortgage with no late payments of 30 days or more within the last six months and no more than one over the last 12 months. You also must have a loan owned by Freddie Mac or Fannie Mae, and your loan must have originated on or before May 1, 2009. Additionally, your current loan to value ratio must be greater than 80%, and your home is your primary residence, a 1-unit second home, or a 1 to 4 unit investment property.

Bottom Line:

Not every homeowner will qualify for loan modification. Talk to your lender and discuss your options. Do not wait until the bank has notified you that they are foreclosing on your home.

If no option to save your house is available you can consider filing Chapter 13 bankruptcy, although this is a serious financial decision with severe financial consequences.