Homeowners "Current on Payments" Now Qualify for a Loan Modification

On Friday, 1/22/2010, the FHA decided to make some changes to FHA-HAMP (Home Affordable Modification Program) to head off the rising defaults and foreclosures.  The politically stated motivation for this announcement by the FHA is, "trying to help people to keep their homes" but the REAL business reason is to slow down the insurance fund losses.  Of the changes announced, the ones that are HUGE are:

•1.       Homeowners DON'T HAVE TO BE BEHIND on payments to qualify for a loan modification.

•2.       Homeowners can defer repayment of mortgage principal - INTEREST FREE!

Before this announcement, a borrower had to fall behind in house payments to be considered to be facing imminent default.  The process of falling behind would damage their credit rating. So, if you have had a job loss, pay decrease, equity loss, rise in interest rate, health problem, family disruption like death or divorce, rising expenses, etc. contact your lender immediately and be proactive in requesting a loan modification.   

Ask that they defer repayment of the principal above the current market value - interest free as one of the terms of the modification.  Here is a good website for determining your current market value:

www.sdsfn.com/myhomevalue.php

The goal of the modification is to lower the total house payment so that it falls between 31% "Front End" and 55% "Back End".  The "Front End" is a ratio of total housing payment to gross income and the "Back End" is the ratio of total housing expense to gross income + recurring monthly debt.

How much principal can be deferred? That is a much more squishy number.  The banks are reimbursed and incentivized for some of this loss through cash incentives and mortgage insurance claims, but any principal deferment above 30% of the loan balance is not covered by mortgage insurance, so they may be less inclined to go as far as you want them to go.

If they do a principal deferment, they won't lower your interest rate so much.  If they don't agree to the principal deferment, they lower the rate more.  Remember, the goal of the loan mod is to get the new payment between 31% front and 55% back.  

Here's an example:

I have this example in an Excel Spreadsheet so you can plug in your income, debt and loan info to get an idea of what your target modification should be.  Disclaimer - This spreadsheet is designed to give you an idea of how the guidelines could be applied and not meant to say what your lender will do for you as each borrower and lender is different and there are many other details that are taken into consideration during a loan mod process.

So, if you have been struggling to make that house payment on time and have a hardship, before you ruin your credit by missing house payments, try to modify - it is in the HUD guidelines now.  Want to read the whole announcement? Here is a link to the HUD announcement on January 22, 2010:

http://www.sdsfn.com/fha-hamp01222010.pdf