What are MHA Loan Modification Guidelines?

by tammy on April 24, 2010

The Making Home Affordable (MHA, www.makinghomeaffordable.gov) program was implemented as part of the national recovery efforts meant to mitigate the housing crisis that developed in 2008. Unlike voluntary loan modification, where the borrower and lender work out their own arrangements, loan modification through the MHA program follows a specific step-by-step process for both borrowers and lenders. This can be positive, in that qualifying borrowers know and understand specifically what is required of them and specifically how their mortgage loan will be modified. On the other hand, it hurts the borrower in several ways, such as inflicting a major blow on their credit rating during the trial period.

On the borrower side, there are five basic requirements that must be met in order to qualify for loan modification under the MHA program. First, the home in question has to be the borrower’s primary residence (a term that has a strict definition) and cannot be a rental property or vacation home. Second, the amount owed on the primary mortgage (excluding second mortgages and other liabilities) has to be $729,750 or less. Third, the primary mortgage (the loan to be modified) has to have been obtained prior to January 1, 2009, since borrowers that received loans after that date should have known precisely what they were getting themselves into. Fourth, the borrower has to be able to show substantial financial hardship, usually involving either a major increase in the monthly mortgage payments, a major decrease of their monthly income, or some sort of major financial disaster. Fifthly and finally, the borrower has to be paying more than thirty-one percent of their monthly gross income on their mortgage payments. Failure to meet any of the five conditions described above automatically excludes borrowers from assistance under the MHA program.

Assuming the borrower meets all the basic requirements, the next step is to approach the lender with a MHA loan modification request along with additional forms permitting the lender to access the borrower’s tax records and other background information. It is important to note that no lender is obligated to accept a MHA loan modification request, even if the borrower qualifies; therefore it is very much in the borrower’s best interest to maintain a good relationship with the lender. Efforts to threaten or cajole lenders into accepting a loan modification proposal are almost certainly guaranteed to fail. Further, some lenders simply opt not to deal with MHA because of the additional paperwork and government mandates involved. However, the government has provided a number of desirable incentives to lenders to accept the MHA program, so many will do so, especially if the alternative would appear to be an imminent foreclosure on the property.

Assuming the lender agrees to a MHA loan modification, the next step is the trial period. This trial period spans three loan payments and the borrower pays the amount that will become final if the loan is eventually modified. During this trial period the borrower is obligated to document all the claims made in the MHA loan modification request and to make the three reduced payments in full and on time. Failure to make the adjusted payments in full and on time or failure to provide any of the documents requested by the lender will result in the entire loan modification process being stopped and the application being rejected. During the trial period the loan has not actually been modified yet, so these three payments are reported to the credit bureaus as incomplete payments, resulting in a significant hit on the borrower’s credit rating.

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