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What Is a Loan Modification and Who Can Be Eligible for It

February 20, 2012 | Comments: 0 | Views: 145

In February 2009 the U.S. government adopted the so called Making Home Affordible Program, aimed to overcome the continuing crisis in the housing market. One of the main parts of this program was the loan modification plan. According to this plan, a loan modification also called a mortgage modification or loan restructuring means a considerable change of the terms of a borrower's loan in case a borrower faces financial hardships and becomes unable to make his mortgage payments on time. In other words, the loan modification plan is designed to restructure troubled mortgages in such a way that house owners could stay afloat. The other goal of loan modification was to stop the decline in real estate market.

For this purpose, according to the loan modification plan, lenders should reduce monthly payments on distressed loans to such a level that they would amount no more than 38 percent of the gross family income. Next, the servicer should conduct the loan modification further, so that this ratio should not exceed 31 percent. In order to achieve such a result, the creditor first of all should lower the interest rate down to 2 percent. If this reduction is not enough, the loan term should be extended, it can be increased up to 40 years. If monthly payments still account for more than 31 per cent of the borrower's gross income, the lender may service the loan principal at no interest. However, it is important to note that for all these concessions, the actual amount of principal while carrying out the modification can not be reduced.

Now let's consider the basic provisions of the equity modification, you necessary need to know if you are the owner of a distressed mortgage.

The borrower is eligible for a loan modification if the following conditions take place:

1) A mortgaged house must be owner-occupied, or in other words, an owner must live in a mortgaged house. The loan modification program is designed to rescue house owners from foreclosure, but it doesn't distribute to the speculators who bought homes for resale or investment. The owner will need to prove this fact by official documents, for instance such as credit reports.

2) Modification concerns only those loans that were received before January 1, 2009. The other condition claims that unpaid loan amount shall not exceed 729 750 dollars.

3) The inability to pay the mortgage payments should be reasoned by actual or potential deterioration of a borrower's financial situation. Such reasons as the reduction of earned income, considerable extra expenditures (due to illness, divorce or other), growing bills and so on, can be mentioned. Financial difficulties should also be documentary verified. It is important to note that the loan modification program does not apply for those who can not pay the mortgage because of job loss or other reasons that led to the fact that you can not arrange monthly payments at all. Loan payments can be reviewed and reduced, but not canceled or postponed.

4) In accordance with the equity modification program, the minimum payment on the loan should be reduced to 31% of the borrower's before-tax income. This means that if the amount of monthly payments is currently less than this value, you can hardly claim to participate in the loan modification program.

To find out whether your loan meets these requirements, you can contact your lender with the application for participation in the program of the loan modification. Next, you will be required to describe in detail your financial situation and prove it by official documents. While the modification you should be ready to do a considerable paper work and prepare a great number of written documents. The lender will inspect the description of all your assets, information on all sources of the household income (before taxes), the last tax returns, the information about the second mortgage on the house, balances on all your credit cards and debts, the application for the loan modification describing all the reasons that led to your financial hardships and proving the necessity of the equity modification.

Also please find more details on my website about lbps loan modification and lbps mortgage.

Source: EzineArticles
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