Even thought the new Obama Making Home Affordable Modification Plan may appear overwhelming at first glance, it is important to understand the process and guidelines of how your lender / servicer will need to lower your monthly mortgage payments to get an approval for a loan modification.
There are several key components of the Home Modification Program that are all focused on one simple goal: to reduce monthly mortgage payments to sustainable levels for the purpose of stabilizing communities, preventing foreclosures, and slow the downward pressure on property values.
To accomplish this goal, the Treasury Department has allocated $75 Billion in a partnership with financial institutions and investors to basically help lower homeowners’ monthly mortgage payments to 31% of their verifiable gross monthly income.
How do I calculate a 31% Debt-to-Income Ratio?
This means that if your monthly income is $1000, then your total principal, interest, taxes, insurance (including homeowners insurance and hazard and flood), and homeowners association fees cannot be higher than $310.
*Mortgage insurance premiums and second mortgage payments are excluded from that ratio and applied to the total monthly Debt-to-Income (DTI) ratio, which needs to be lower than 55% without having to speak with a HUD-Approved counseling agency first.
*The total DTI ratio is a factor for a home loan modification approval which takes into account all other monthly expenses and liabilities included on the financial worksheet submitted with the complete application package.
To get your monthly payment down to the 31% Front-End target under the Making Home Affordable plan, lenders have the following options:
1. Interest rates can be reduced as low as 2%
2. Lenders can extend the term of the loan up to a max 40 years
3. Forbear principle at no interest
The modification program goes through an initial 90 day trial period and then the modified payments will be kept in place for five years where the loan rate will be capped for the life of the loan. After the five years, the interest rate can be gradually stepped-up by 1% per year to the conforming loan survey rate in place at the time of the modification
Keep these things in mind when negotiating for a home modification loan:
- Borrowers can only qualify for the Making Home Affordable Modification Plan one time, which is why understanding your negotiation position is vital to ensure you get the best deal for your future financial goals and expectations.
- Pay close attention to your current and expected budget when filling out the financial worksheet.
- Make sure to analyze the difference between getting a lower interest rate with a shorter term vs taking a higher rate at a 40 year payoff plan.
- If a Forbearance is needed to qualify, make sure you are prepared to payoff the remaining balance if your home value does not increase by the time you are ready to sell.
- It is important to budget for the increase in interest rates after the five year modification term.
Related Articles
- Do I Qualify For The Obama Making Home Affordable Modification?
- How Much Will My Payment Decrease With A Loan Modification?
- Will A Loan Modification Affect My Credit?
- Getting Approved For A Loan Modification – It’s All In The Packaging
- Required Documents For A Loan Modification
- Writing A Loan Modification Hardship Letter
With No Up-Front Fees, our clients only pay for Results.
Call us today if you have questions about packaging and
submitting a Loan Modification request.
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