What is Necessary to Qualify for a Loan Modification

by tammy on March 7, 2010

Any borrower can approach their lender at any time to initiate negotiations for loan modifications and generally speaking most lenders have a series of programs available. More often than not the terms can be realized if the borrower initiates negotiations before he or she fall behind in their payments, though there is nothing preventing a borrower from suggesting loan modification after they are already delinquent, or even after foreclosure or bankruptcy proceedings have begun. However, in order to qualify for loan modification under the federal government’s Home Affordable Modification Program (HAMP), there are five specific conditions that must be met.

First, the home in question has to be the borrower’s primary residence, meaning that people cannot appeal to HAMP to stop foreclosure on secondary homes, rental properties, or vacation homes. Second, the amount owed on the primary mortgage – the one the borrower is seeking to modify – has to be $729,750 or less. Third, the current mortgage has to have been obtained prior to January 1, 2009, so people with more recent mortgages do not qualify for assistance under HAMP though other options may be available.

The fourth qualification for loan modification under HAMP is that the borrower has to be having trouble paying their mortgage. This is more than merely saying so; instead the borrower has to substantiate this claim. The claimed difficulties have to be listed on the Request for Modification and Affidavit (RMA) form that initiates the HAMP process. While the RMA itself instructs borrowers not to provide lengthy explanations, once this material is sent to the lender, the lender will investigate thoroughly and expect the borrower to substantiate their claims of economic hardship. The entire process may be stopped and rejected if the borrower is not really suffering hardship.

The fifth, and final, qualification for loan modification under HAMP is that the borrower monthly mortgage payment has to be in excess of thirty-one percent of their current monthly gross income. It is important to note that this refers to gross income (the total amount made before expenses) not net income (the total amount actually brought home each month). Further, as is the case with the fourth qualification, all of this has to be substantiated. The borrower will have to provide the lender with not only comprehensive proof of all income, but also their last tax return and other documentation.

If a borrower meets all five of the conditions described above, they may qualify for loan modification under HAMP. However, unlike independent loan modification, in which the borrower and lender sit down together and thresh out an agreement, the HAMP program is structured. That is, there is a very specific process that the lender and borrower must follow in order to reach loan modification agreement that the program will fund. If the borrower has a stable income and just needs some temporary relief, he or she may be able to get a better deal through direct negotiation as opposed to using HAMP. A savvy borrower may want to consider free negotiation first and using the HAMP option as a contingency plan if the free negotiation fails.

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