Before you apply for a loan modification, it is wise to
understand and have realistic expectations about the process. The Home
Affordable Modification Program, now in its fifth year, is the federal
modification program that has, to date, successfully provided for over 1.3
million permanent loan modifications nationwide. Many homeowners, however, do
not know the steps in the HAMP
modification process and feel frustrated or upset if they receive a modification
with terms that are not what they expected. What homeowners must realize is
that a HAMP
Tier 1 loan modification requires a 31% debt-to-income ratio and must be
reviewed in a ‘waterfall’ process, meaning that the Lender must modify the loan
by specific means in a specific order.
The waterfall process is as follows:
1. Capitalization: When the Lender adds unpaid
interest and unpaid tax and insurance payments to the principal balance. Late
fees may not be capitalized for HAMP
modifications.
2. Interest rate reduction: When the Lender reduces
the original interest rate of the loan. Oftentimes, the Lender reduces the
interest rate to 2% for the first five years and then gradually increases the
interest rate on the loan every year until it reaches the current market value.
3. Term extension: When the Lender extends the life
of the loan. The cap on a term extension for HAMP
is 480 months or 40 years.
4. Principal forbearance: When the Lender forbears a
portion of the principal balance. This portion of the principal balance becomes
a “balloon payment,” which must be paid in full at the loan’s maturity or when
there is a transfer of the property. It does not accrue interest.
If the debt-to-income ratio is not 31% after the Lender
capitalizes the loan, then the Lender must then try to reduce the interest rate
and so on until it achieves the desired ratio. If the ratio is still not 31%
after the Lender has gone through the entire waterfall process, then the homeowner
will be deemed ineligible for HAMP
Tier 1 and then will be reviewed for other loan modifications, if available.
