Your mortgage has become unmanageable, yet you could handle the monthly payments if you could get your home loan modified. By lowering your interest rate, stretching out your loan term, or possibly reducing the principal balance, your mortgage lender could help you stay in your home, and get past a bad patch in your finances. Let's look at some of the options available for loan modification.
To qualify for a mortgage modification under the U.S. government's Making Home Affordable program, you must:
- Use the property as your primary residence.
- Owe no more than $729,750.
- Suffer from a mortgage payment increase, an income reduction, or other hardship that has increased your expenses.
- Have taken out your mortgage before January 1, 2009.
- Have a total housing expense -- including principal, interest, property taxes, insurance, and homeowners association dues -- that exceeds 31% of your gross income.
If all of the above are true, then you qualify for a modification under HAMP. But what if you don't qualify? What if the property isn't your primary residence? What if it isn't even a residence? What if you just got your mortgage six months ago and then lost your job -- what then?
HAMP Is Voluntary -- and So Are All Modifications
Your mortgage lender is not required to modify your home loan, even under HAMP. Many eligible homeowners have been denied modifications after the servicer saw that the homeowners had assets that could be tapped in order to make the mortgage payments. For those that live in states that allow deficiency judgments -- meaning that lenders can sue homeowners for any loan balances not satisfied by a foreclosure sale -- it's even tougher to get a modification. Making Home Affordable also recognizes that mortgage servicers have a legal duty to the loan's owner: any loan over 60 days delinquent must have its cash flow analyzed before a modification can be granted, and if the lender would lose less by foreclosing, the borrower will not get a modification.
Your Mortgage Lender Can Choose to Modify Your Loan
The only thing that HAMP does is offer loan servicers some compensation for modifying your mortgage. It absorbs some of the administrative costs and the cost of lowering your interest rate. But even without HAMP, a mortgage lender can choose to modify your mortgage if it's in their best interest to do so. Your job is to prove to your lender that they will get more money out of you by modifying your mortgage than by foreclosing on your home.
Who Is More Likely to Get a Modification?
Borrowers in the following situations may have greater success when asking their mortgage lender for a loan modification:
- Borrowers who are underwater on their home loans. If the lender cannot recoup their money in a foreclosure sale, it has more incentive to work things out with you.
- Borrowers who live in non-recourse states. Those in non-recourse states have better luck with modifications because lenders cannot sue them for deficiencies. The specific statutes can be complicated and may differ by type of loan, but according to the Federal Reserve Bank of Richmond, Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington, and Wisconsin can all be thought of as non-recourse states.
- Borrowers in a position to file for bankruptcy to avoid deficiency judgments. An hour with a good bankruptcy lawyer can pay big dividends.
- Those who have resolved their problems. For example, those who find new jobs, or who have enough income to make a reasonably modified payment.
- Those who can document a genuine hardship. This could include catastrophic medical bills, for instance. On the other hand, if your difficulties are due to bad money management, the mortgage lender has little reason to believe that a modification will stick.
- Borrowers with no assets or assets like retirement funds that are protected in bankruptcy proceedings.
To see what your chances of getting a mortgage modification are, calculate what percentage of your gross income your current housing expense (including principal, interest, taxes, insurance and homeowner's association dues, if applicable) is. Next, run your current loan terms through a mortgage calculator, varying the terms to see if you can get that housing expense down to 31% of your gross income (or your entire debt-to-income ratio to less than 50% if it's an investment property that you're trying to save). When running the calculations, remember that your modified mortgage rate can't be lower than 2%. If lowering the rate is not enough to get your housing-expense ratio down, try stretching out your mortgage term. Under HAMP, principal reductions are encouraged, but lenders are reluctant to grant them. If your lender can help you without reducing the principal balance, you may have an easier time convincing them to modify your home loan.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.