Loan Modification Rules and Laws

by Junior Boomer on March 2, 2011

Under the federal government’s Making Home Affordable plan, many US homeowners can apply to modify their current mortgage loan to help get more affordable or stable loans. The program encourages mortgage lenders to help homeowners who are struggling to meet their monthly mortgage payments, by reducing the principal, renegotiating the terms, or lowering the interest rate. Currently only mortgage’s owned by Fannie Mae or Freddie Mac are required to participate in the program, but other lenders are encouraged to take part as well. This program is not designed for all homeowners, including those already in foreclosure.

Determining Eligibility

Determining eligibility to apply for a Home Affordable Modification can be tricky. Even after figuring out eligibility, homeowners may still not qualify. Only a lender can determine if the homeowner actually qualifies for a loan modification. But homeowners can get started by seeing if these rules apply to them:

  • the person applying must live in the home that they are looking to renegotiate the mortgage for
  • the mortgage loan must have originated prior to January 1, 2009
  • the amount owed must be approximately three quarters of a million dollars or less
  • current mortgage payments must be up to date
  • homeowners must be experiencing a financial hardship due to a reduction in income or increased payment rates
  • the mortgage payment must be more then 31% of the homeowners gross income

If these situations apply, then the homeowners may qualify for a Home Affordable Modification loan for a three to four month trial basis. Once it is determined that a homeowner can make timely payments over the trial period, then the mortgage modification will be made permanent.

Reasons a person may be denied a Home Affordable Modification loan include several things. One is that the homeowner may make too much money, therefore technically making them able to pay the mortgage (even if they claim financial hardship). Another reason is that the homeowner makes too little money, meaning that even with the modification it’s not likely that the homeowner would be able to make the reduced mortgage payments.

Documentation Rules

In order to cut down on the amount of homeowners providing false information over the phone in screening interviews, and to determine true eligibility, some new rules were established effective June 2010. Homeowners must now provide several pieces of documentation to apply for the mortgage modification.

These items include:

  • year-to-date earnings shown on two recent pay stubs
  • signed IRS forms 4506-T or 4506T-EZ – this form gives permission for the mortgage servicer to contact the IRS for the homeowners most recent tax information
  • Request for Modification Affidavit (RMA) – a form that shows the mortgage servicer about the homeowners income and living situation
  • statement regarding why one needs a mortgage loan modification – can include things like lost or reduced wages, incurred medical expenses, increased interest payments, or anything that is impacting the ability to continue to make timely mortgage payments

All of the necessary forms can be downloaded and printed from makinghomeaffordable.gov .

Homeowners can mail or hand deliver all of the documentation mentioned above to their mortgage lender when they are ready to apply for the Home Affordable Modification Program.

Creative Commons License photo credit: jferzoco

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