What Initial Steps are Needed to Modify a Loan?

by tammy on March 28, 2010

Generally speaking, there is no actual “process” per se for proposing a loan modification to your lender. Anyone can ask for this at any time with or without cause or preparation. However, most lenders are unlikely to be overly enthusiastic about any borrower initiated loan modification ideas, so it certainly helps to have a well thought out presentation and to have all of your claims well documented before approaching the lender. The exception to this lack of process is if you are seeking a loan modification through the federal government’s Making Home Affordable (MHA) program. In this case, there a five primary conditions that must be met.

First, the home in question has to be the borrower’s primary residence, as defined by the Internal Revenue service (IRS). The IRS actually refers to the primary residence as the “principal residence” and means the residence has to be actively resided in longer than any other residence throughout the calendar year. Added to this definition are a number of ways in which the residence’s address is used: as the primary place for correspondence; the primary address used by Social Security, voter registration, driver’s license, and other government purposes; and others. Basically this provision means that people seeking loan modification for other properties cannot use MHA.

The second condition is that the amount due on the first (primary) mortgage cannot exceed $729,750. The basic idea is that if more than this is owed, then the residence in question is probably beyond the means of anyone that should be asking for loan modification through the MHA program. If you owe almost three quarters of a million dollars on the mortgage, then the house is presumably far more than you should be trying to live in.

The third condition is that the current mortgage had to have been obtained prior to January 1, 2009. The idea behind the MHA program is to help people that got caught up in the real estate bubble and agreed to the terms of their mortgage before the bursting of the real estate bubble and economic downturn. By January 2009 the economic downturn was already in full swing, so anyone purchasing a home after that date should have accepted terms that they could meet in the current economic climate.

Being able to show economic hardship is the fourth condition. Basically, in order to take advantage of the MHA program, the borrower has to show – and document – precisely why they are no longer able to meet the terms they initially agreed to. Most commonly this hardship requirement is based on one or more of three factors: (a) the mortgage was not fixed and the payments have significantly increased; (b) the borrower has suffered a dramatic decrease if income (often related to unemployment); or (c) the borrower has suffered a financial disaster (such as a medical emergency with large bills).

The final qualification is basically a means test that compares the amount paid on the mortgage payments against the borrower’s adjusted gross income. In order to qualify for loan modification under the MHA program, the borrower’s monthly mortgage payments (principal, interest, taxes, insurance and homeowner’s association dues) has to exceed thirty-one percent of the borrowers monthly gross inco

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