What Happens After You Are Approved for a Loan Modification?

by tammy on April 1, 2010

When dealing with a voluntary loan modification, there is no set phase in or adjustment between approval and implementation. However, this is not the case with loan modifications that come about through the government-sponsored Making Home Affordable (or Home Affordable Modification Program, HAMP, www.makinghomeaffordable.gov) program. Loan modifications that come from the HAMP feature a special trial period that lasts for three payments. This trial period allows the lender to test the borrower’s seriousness and can result in a previously approved borrower being denied an actual loan modification if they fail to meet the requirements.

 

Once the borrower is approved for loan modification under HAMP, he or she begins the three payment trial period. During this time, the loan has not actually been modified, however the borrower is expected to pay the amount due if the proposed loan modification is finally approved. During this trial period the adjusted (reduced) amount has to be paid in full and strictly on time. Failure to pay the entire amount by the trial period’s due dates will result in the entire loan modification offer being withdrawn, meaning that the borrower is not only declined a loan modification, but also owes the balance due under the old mortgage payment scheme before the trial period began. Further, the borrower will also be liable for any penalties imposed by the original mortgage for failure to pay the entire amount on time.

 

The trial period is also used to substantiate the claims made in the initial HAMP application. Some documentation is required when initially applying for HAMP, namely the Request Form, an IRS Form 4506T (which authorizes the lender to view the borrower’s tax records), as well as documentation that shows the borrower’s current income. However, many documents are not requested at this initial phase, including all of the documents that substantiate the claim of financial hardship. During the trial period, all of the documentation that was not included with the initial application will be asked for. The borrower has to obtain and forward to the lender all requested documentation by the end of the trial period and failure to do so will result in being declined for loan modification under HAMP.

 

For the borrower, the worst effect of this trial period is on their credit rating. Although they are instructed to pay the reduced amount that will become standard if the loan modification goes through; during the trial period the loan modification has not actually happened. This means that the trial period payments are shown as incomplete payments on the borrower’s credit report. As a consequence, anyone on a HAMP trial period can expect three negative reporting items to show up on their credit reports even if everything runs smoothly and the loan modification is eventually implemented. If the borrower makes a payment a late, not only are they disqualified from HAMP, but the late payment is also reported on their credit record and the borrower owes the balance due under the unmodified mortgage payment plan.

 

Most loan modification schemes result in at least some negative reporting on their credit report, but loan modification under HAMP is specifically designed to inflict a serious blow to the qualifying borrower’s credit through the three month trial period. This is generally justified by the credit bureaus by pointing out that anyone that qualifies for loan modification under HAMP does in fact represent a larger credit risk.

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