Making Your Home Affordable - How to Modify Your Mortgage

One of the few government stimulus plans available directly to the American people is the Home Affordable Modification Plan (HAMP).

Bank and government websites reiterate that homeowners should avoid foreclosure rescue scams and deal directly with their mortgage holders as participation in this program is free. Still, there are services out there offering to help homebuyers process their paperwork - some with fees as high as $1,800 or more. These services claim that the paperwork is too difficult for most homeowners to wade through, thus, having someone guide them is a prudent expenditure.

Despite the government's previous claims that homeowners could "do-it-themselves", on November 30, the U.S. Department of the Treasury and Housing and Urban Development (HUD) kicked off an extensive plan to provide further assistance and tools to struggling homeowners in an effort to get more qualified mortgages through the cumbersome process.

Here's a basic synopsis of the program and some tips for getting through the maze of paperwork if you are doing it on your own:

There are actually two parts to the program. The first part is Home Affordable Refinancing and is limited to homeowners whose mortgages are held by Fannie Mae or Freddie Mac. To qualify for this plan, homeowners must be current on their mortgages. Primarily, this part of the program is designed to help homeowners who cannot take advantage of the current low interest rates because the devaluation of their homes has placed them in an upside-down position in their mortgage. This program allows the homeowner to refinance as long as the mortgage is not more than 125% of the home's current value.

The second part of the homeowner assistance plan, the Home Affordable Modification Plan, is available to a much broader group of homeowners.

If your current monthly mortgage payment (principal, interest, taxes, insurance, and home owner's association fees) is more than 31% of your gross monthly income, you may qualify for a HAMP loan modification. The modification plan is voluntary on the part of the mortgage holder, but many banks and loan servicers are participating.

Additional qualifications for the modification plan are as follows:

The borrower must be having difficulty paying their mortgage.

The loan being modified must be a first mortgage on a primary residence. You may have a secondary mortgage, and even a secondary home, but they do not qualify for the modification program.

The outstanding balance on the first mortgage must be equal to or less than $729,750 on a one-unit residence. Limits are higher if the house is a multi-unit building. You may still qualify for the program if you own a multi-unit building as long as one of the units is used as your primary residence.

The original loan must have been entered into before January 1, 2009.

If the borrower's total debt exceeds 55% of their gross income, the borrower must enroll in consumer credit counseling in order to receive the modification.

The Act provides a reduction in your home mortgage interest to as low as 2% to reduce your monthly payments to the 31% level. If that still is not enough, lenders may extend the repayment period for your mortgage to 40 years. If your payments are not at the 31% level with the interest rate reduction and the time extension, the lender may also offer a balloon payment. Balloon payments do not accrue interest and are due when you pay off your loan, refinance, or sell your home.

A caveat here: If your mortgage interest rate is reduced to less than the market rate determined by the Freddie Mac Primary Mortgage Market Rate Survey at the time of the modification, your interest rate will be fixed for five years. Beginning in year six, the rate can be adjusted at a rate of no more than 1% per year until the rate reaches the market interest rate. Again, this rate is determined at the time the modification is prepared, not in six years. As of the week of November 25, 2009, that rate was 4.78% for a 30-year fixed rate mortgage.

Do you qualify? If so, here are some tips on filling out the paperwork and getting the process in motion.

The first step is to request a modification. Seems simple enough, but appearances can be deceiving - that's why people are paying to have the paperwork completed for them.

While the HUD website recommends specific information, and even includes checklists and instructions on filling out the Request for Modification Affidavit, I suggest you first contact your servicer directly.

Some banks may require more information than is listed on the HUD website. If you send a package in, even if it is complete by HUD standards, you may find yourself receiving a telephone call or letter requesting more information. This will only delay the process. Continued requests for additional information can be extremely frustrating. Also, banks may deny your request altogether if all required documentation is not received in a timely manner.

Chase Mortgage has a link to its requirements on its home page. All required forms are available to be downloaded from the website and a checklist for both wage earners (W-2 holders) and self-employed borrowers is included. All banks do not make the information so convenient. You may have to make a telephone call, or two.

Request for Modification and Affidavit - The form will request your overall financial data as well as information on your specific hardship. For all mortgage servicers, this form will have to be filled out.

Tip: If your situation is caused by multiple factors, list all of them. Be as detailed as you can be. This is especially important if you are current on your mortgage. You must prove that you are in imminent danger of defaulting on your loan in order to qualify for the modification.

Make sure your financial information is all inclusive; however, borrowers do not have to include child support, alimony, or separation maintenance income unless they choose to have it considered by the servicer. Since the modification will reduce your payment to 31% of your gross income, you need to determine if you want this income considered.

Submit IRS Tax form 4506-T EZ - This form allows your mortgage servicer to receive copies of your prior year's tax returns directly from the IRS for verification of income and residency.

Tip: Make sure to include this form, signed, in your package, even if you submit copies of your tax returns. Also, make sure you include all schedules and attachments filed with your original tax return - not just your 1040 form.

Submit proof of income. HUD suggests wage earners submit their two most recent paystubs, including year-to-date income. Self-employed individuals should provide a quarterly or year-to-date profit and loss statement.

Tip: This is where contacting your loan servicer for its required documentation will be most helpful. Chase requires that the profit and loss statement be audited. That is not a requirement on the HUD website.

Some servicers will also require copies of your most recent bank statements - as many as four months worth.

Tip: Make sure you copy both sides of your bank statements and include all pages. I know this sounds like a silly tip, but in talking to a Chase mortgage servicer, she indicated that it is a common mistake - people put their paperwork in a copy machine feeder and do not think about copying the back sides of the documents.

Once your modification is approved, your mortgage will enter a trial period. The permanent modification is not locked in until you pay your mortgage on time through the trial period. If you don't, the bank can resume other collection methods.

In addition, there is an incentive for making those payments on time once the loan has been modified. If your modified payments reflect a reduction of 6% or more from the original loan payment, the homeowner can receive a "Pay for Performance Success" payment in the form of an annual principal reduction up to $1,000. The credit is applied directly to the principal of the loan for five years. Just be sure to pay on time. If the loan becomes delinquent, all unapplied credits are lost and no further credits can be earned, even if the loan becomes current at a later date.

You have until December 31, 2012, to apply for a modification.