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The loan modification process involves the standard procedure of modifying the loan to new affordable monthly payment terms. This is called the waterfall method and is mandated for use under the Treasury Department’s loan workout plan. This plan 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 will fit this modification method.
The loan modification process begins with the borrower contacting their lender and requesting consideration for HAMP. Asking specifically for this plan is important because lenders are required to review every homeowner who asks for help under this plan. While your file is being reviewed for eligibility, the lender is not allowed to move your home forward for a 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 along with your income documentation, your entire package will be reviewed for eligibility and acceptability. Here is the basic loan modification process:
- Homeowners are urged to consider HAMP
- Borrowers complete an application package and provide proof of income
- The lender reviews the information provided by the homeowner for eligibility
- A waterfall method of change is attempted and acceptability determined
- If the loan can be modified using standard terms, the homeowner may be approved for the loan modification.
- The landlord enters a trial modification period of 3 months, after which the mode is made permanent
How exactly does the waterfall method of change work? This standard formula uses several criteria to determine which loans and borrowers will be eligible. Remember that the homeowner provides their financial information – monthly income, monthly expenses, cash in the bank, etc. – on their application form and this is the information that is used when determining whether the homeowner will qualify. The lender will use standard methods of reducing the current mortgage to meet the new target mortgage payment. This new payment will equal 31% of the borrowers gross monthly income and includes principal, interest, taxes, insurance and any HOA dues.
The first waterfall method step to reach the target payment is to reduce the interest rate, and the rate can go as low as 2%. If further modifications are required to reach the target, the loan tenure can be extended up to 40 years. The final step is to forgive or defer some principal balance to reach the new desired target payment. This is called the waterfall method because the lender must follow these steps in order, as they are required. However, if the borrowers income is too low or too high, or if the loan balance is high enough to require a large principal reduction, a loan modification may be denied.
Homeowners hoping to get approved need to understand how the loan modification process works and most importantly how they should complete their financial statement to be accepted. If you know ahead of time how much income you need to prove eligibility, you will be able to make the necessary adjustments and submit an acceptable application. If you knew that just by dropping a hundred dollars a month, you would fit within the guidelines, you would definitely do it, right? This can be confusing for borrowers, but you can use a loan mode software program that will actually show you how much income you need and where you may need to fine-tune your figures to fit within the standard HAMP guidelines.
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