What Would Prevent Me From Qualifying For a Loan Modification?

by tammy on March 12, 2010

Generally speaking, there are no specific qualifications that have to be met in order to negotiate a modification to a mortgage loan. Loan modification is an open process of negotiation between the borrower and the lender and either party has the right to accept or reject proposed modifications for any reason. In the current economic climate it is usually in the lender’s interest to negotiate a loan modification as opposed to foreclosing, so the only real qualifying factor in play is that most lenders expect borrowers to document that they are undergoing financial hardship and can no longer meet the original terms of the loan. If this is the case, most lenders will be willing to negotiate with the borrower in order to keep the original loan solvent.

One very large exception to this rule is if the borrower is seeking loan modification through the government sponsored Making Home Affordable initiative. The Making Home Affordable program (makinghomeaffordable.gov) is administrated by the Department of Housing and Urban Development on the consumer side and offers borrowers both refinancing and loan modification options. The loan modification option, like most government programs, is carefully structured and borrowers have to qualify to use it.

There are five conditions that have to be met in order to take advantage of loan modification under the Making Home Affordable program: (a) the home in question has to be the borrower’s legal primary residence; (b) the amount owed on the primary (first) mortgage has to be less than $729,750; (c) the borrower has to be able to show and substantiate financial hardship that is making keeping up with the original terms of the loan difficult; (d) the current mortgage had to have been obtained prior to January 1, 2009; and (e) the monthly mortgage payments has to be in excess of thirty-one percent of the borrowers gross (not net) monthly income. Failure to meet any of these conditions excludes the borrower form loan modification through this program.

Even if the borrower qualifies for loan modification under this program it still does not necessarily mean that he or she will receive a loan modification agreement. The lender is not obligated to grant the loan modification even to qualifying borrowers, though the government provides a number of incentives to persuade mortgage lenders to do so. More often than not, the mortgage lender will grant loan modification under this program in order to receive the incentives from the government; however if the borrower and lender already have a hostile relationship, the lender does not have to agree or grant the borrower any relief whatsoever. This is a big part of the reason that it is usually in the borrower’s best interest to maintain a good relationship with the lender regardless of the hardships being faced. When it comes to loan modification, either normal modification or through the Making Home Affordable program, maintaining a cordial relationship usually pays off.

Other than the Making Home Affordable exception, there are no uniform terms or conditions to qualify for loan modification, though many lenders may have their own “in house” qualifications that have to be met.

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