What to Consider Before Moving Forward with a Loan Modification – Part II

Cogburn Law
Madeleine Jones
March 12, 2013

What Programs Are Available to Me?

Each investor has their own set of guidelines and modification programs in which they participate.  In order to make the best decision for you and your family you need to know which programs are available so that you can decide if the modification is a worthwhile process for your individual situation.

Home Affordable Modification Program (HAMP) for Non-Government Loans:

By far the most common and well-known modification program is the Home Affordable Modification Program, or HAMP.  HAMP is part of the government backed Making Home Affordable Program.  HAMP has separate guidelines for government loans (Fannie Mae, Freddie Mac, FHA or VA) and non-government loans. For non-government loans, the servicer and investor will receive compensation from the government for approving these modifications. All major banks and the majority of small banks (other than credit unions) participate in HAMP.  There are two separate HAMP programs, HAMP Tier 1 and the more recent HAMP Tier 2.

Under HAMP Tier 1, the servicer looks at your income and targets your monthly mortgage payment to 31% of your gross (before taxes) income.  The servicer must also consider factors such as delinquency, mortgage balance, current value of the home and other factors. Under HAMP Tier 2, the value of your home is examined and if you are underwater, the servicer will re-amortize your loan to 40 years at market rate.  If the resulting payment is within 10% and 55% of your gross monthly income, you would qualify under HAMP Tier 2.  Under both HAMP Tier 1 and Tier 2 the servicer is permitted to forgive principal in order to get you into a payment that meets the program guidelines.

Home Affordable Modification Program (HAMP) For Fannie Mae and Freddie Mac:

Fannie Mae and Freddie Mac both participate in HAMP Tier 1.  The main difference between a Fannie/Freddie HAMP modification and a non-Fannie/Freddie HAMP modification is that Fannie Mae and Freddie Mac will NOT offer a principal reduction.  They may defer principal but they will not forgive it.  Deferred principal means that there is a portion of your mortgage balance that does not accrue interest and you do not pay as part of your mortgage payment.  It is a balloon that you would be required to pay should you sell your home or the term of the loan expires.

The Federal Housing Administration, or FHA, also participates in HAMP and targets a 31% payment but like Fannie Mae and Freddie Mac, FHA will not forgive principal.  FHA also has stricter restrictions on deferments which makes it more difficult to qualify for an FHA-HAMP modification.

If you believe a loan modification may be the right choice for you, contact the attorneys at Cogburn Law Offices today to learn more.