The loan modification process involves a standard way of modifying the loan to new affordable monthly payment terms. This is called the waterfall method and is mandated by the Treasury Department’s debt workout plan. This scheme is called HAMP – Home Affordable Modification Program. When your lender reviews your application, part of the process will be to determine whether your loan and financial circumstances are compatible with this method of modification.
The loan modification process begins with a borrower contacting their lender and requesting to be considered for HAMP. It is important to ask specifically for this plan because lenders are required to review each homeowner seeking help under this plan. While your file is being reviewed for eligibility, the lender is not permitted to proceed with your home for foreclosure sale. So this gives you some time and second chance to save your home with loan workout.
Once you complete your loan modification application and send it in with your income documentation, your entire package will be reviewed for eligibility and acceptability. Here is the basic loan modification process:
- Homeowners request consideration for HAMP
- Borrower completes application package and provides proof of income
- Lender reviews information provided by homeowner for eligibility
- Waterfall method of revision is attempted and acceptability determined
- If the loan can be modified using standard terms, the homeowner can be approved for a loan modification
- Homeowner enters a 3-month trial modification period, after which the mod is made permanent
How exactly does the waterfall method of revision work? This standard formula uses several criteria to determine which loans and borrowers will be eligible. Remember that the homeowner is providing their financial information on their application form – monthly income, monthly expenses, cash in the bank, etc. – and it is this information that is used to determine whether the homeowner will qualify. The lender will use standard methods of reducing the current mortgage to meet a new target mortgage payment. This new payment will be equal to 31% of the borrower’s gross monthly income and includes principal, interest, taxes, insurance and any HOA dues.
The first waterfall method is to reduce the interest rate to reach the target payment, and the rate can be as low as 2%. If further changes are required to reach the target, the loan tenure can be extended up to 40 years. The final step is to forgive or defer certain principal balances to reach the new desired target payment. This is called the waterfall method because the lender must follow these steps as needed. However, a loan modification may be denied if the borrower’s income is too low or too high, or if the loan balance is so high that a large principal reduction would be required.
Homeowners hoping to be approved need to understand how the loan modification process works and most importantly, how they must complete their financial statement so that it is acceptable. If you know ahead of time how much income you need to prove to qualify, you’ll be able to make the necessary adjustments and submit an acceptable application. If you knew that by cutting expenses by just a few hundred dollars a month, you would be in line with the guidelines, of course you would do that, right? It’s confusing for borrowers, but you can use a loan mod software program that will show you exactly how much income you need and adjust your figures to fit standard HAMP guidelines. Might be possible.