If you're a homeowner and are facing a foreclosure situation, you may be looking to save your home so you can continue living in it. To do so, you will have to come to some sort of arrangement with your lender regarding the payments still due on the mortgage.
In judicial states, those states that require the lender to get permission from the court to foreclose on the property, homeowners may hire an attorney to defend themselves against the foreclosure action in the court system by making an argument that the lender's case is in error of some sort - either through fraud, or not following the proper legal processes, or by proving their records are in error.
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The second and more common method of defending against foreclosure, either in judicial states or trustee states, is to work with your lender towards some sort of mutually beneficial financial arrangement that lets the homeowner continue residing in the house at some sort of modified payment plan. This method is more commonly referred to as a loan modification.
The Departments of the Treasury & Housing and Urban Development established the Making Home Affordable plan to help homeowners and lenders work together in the best interests of both parties. In the process, they established some loan modification guidelines to help servicers accomplish these goals.
The Making Homes Affordable guidelines are intended to help standardize and streamline the process. Some of these Making Homes Affordable Guidelines are specific HAMP program qualifications, such as "your loan must be owned by FHA, Fannie Mae, or Freddie Mac", and "the property must be a primary residence." But some other Making Home Affordable guidelines were established to help servicers develop a process of qualifying homeowners for both HAMP loan modifications and non-HAMP loan modifications.
HAMP established a methodology called the "waterfall" method for servicers to follow when working with homeowners to lower payments. These Making Homes Affordable guidelines for the waterfall method let servicers lower the monthly payments for homeowners, while simultaneously earning the highest return for the investors behind the mortgage. This creates a win-win situation for both parties - homeowners receive a lower payment allowing them to stay in their home, while the investors that lent the money minimize their financial losses and receive the highest possible rate of return on their money, that they can then use to help other homeowners buy a home.
The waterfall method calls for first reducing the interest rate on the loan in 1/8 point increments (0.125%) until the mortgage payment is no more than 31% of the household's gross income. 31% of gross income is the target loan modification payment. Lenders/servicers may continue lowering the interest rate in 0.125% increments down to a minimum interest rate of 2%.
Next, if the interest rate has been lowered to 2% but the monthly payment is still higher than the allowable 31%, the Making Homes Affordable guidelines create the next step in the waterfall method, which is extending the loan terms (the amount of time allowed to payback the loan) in 1 month increments from 30 years (360 months) out to a maximum of 40 years (480 months). Since there will be an extra 10 years to pay off the loan, the amount of principal being paid off each month is significantly lower, thereby helping lower the monthly amount to reach the target payment.
If the highest affordable payment still cannot be reached by extending the term of the loan to 40 years, the Making Home Affordable guidelines allow servicers to both extend the term of the loan AND lower the interest rate in 0.125% increments down to a minimum interest rate of 2%.
If the target payment is still not achieved using these methods, the Making Homes Affordable guidelines define the next step in the waterfall to be principal forbearance. This is a reduction in the principal amount that can be charged interest on, while the remaining principal amount that is not charged interest is lumped together into a single balloon payment to be paid when the loan is paid off. The principal amount of the original loan balance that is now in forbearance is interest free.
The Making Homes Affordable guidelines define the final step of the waterfall method to be complete principal forgiveness. However, it should be noted that Principal Forgiveness is VOLUNTARY under the current Making Home Affordable guidelines.
How Does This Information Help Homeowners?
With the Making Homes Affordable Guidelines described above, homeowners can actually determine whether or not they meet the HAMP requirements and can use the loan modification guidelines described above to see if they qualify for a HAMP loan modification with their servicer.
Using any mortgage calculator on the internet, homeowners can follow a simple process to turn it into a loan modification calculator to find out what interest rate they would need to receive in order to meet the target HAMP loan modification payment of no more than 31% of the gross household income.
To use the calculators, simply enter the following 3 pieces of information:the amount due on the mortgage statement the loan term in years (or months) for either 30 years (360 months) or 40 years (480 months) the current interest rate on the loan reduced by 0.125%
Using the mortgage calculator, keep repeating the process until the payment returned on the calculator is less than the target payment of 31% of the household income. Remember to adjust the target payment to account for monthly escrow amounts for real estate taxes, homeowners insurance, and any homeowner association fees. Simply divide the annual amounts for each expense (taxes, insurance, HOA fees) by 12 to convert the annual expense into a monthly expense. Then subtract each monthly expense amount from the target payment amount. This needs to be done because the affordable target monthly payment amount set by HAMP INCLUDES principal, interest, taxes, insurance, and HOA fees. However, lenders have no ability to modify these other expenses and can only lower the interest rate on the principal amount of the loan.
A simpler loan modification calculator can be found at http://www.myLoanModCalculator.org. myLoanModCalculator was created using the Making Homes Affordable guidelines to give homeowners a quick and easy way to determine what interest rate they need in order to meet the target payment of 31% of their gross income. This free loan modification calculator will automatically determine the target loan modification payment based on the income provided, adjust it for taxes, insurance, and HOA fees, and determine the interest rate and loan terms required to meet the target payment. In just 90 seconds, homeowners can now find out if they meet the loan modification rules as set forth in the Making Homes Affordable guidelines.
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