It's probably obvious that the U.S. real estate market is in dire straits right now. President Obama's home loan modification plan is a direct response to this crisis. The plan became effective Mach 4, 2009 and homeowners can modify their loans until the end of 2012. Under this plan, homeowners with unaffordable mortgages have a new alternative to foreclosure available to them. Rather than letting the bank repossess their house, they can now get their mortgage loans modified so they can have new, more affordable monthly payments.
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To qualify for modified loans, people must be the owner and occupier of the house. That precludes any vacant houses or investment properties. Loans to be modified have to be loans insured by either Freddie Mac or Fannie Mae, and they have to have a date of origination before the beginning of the year 2009. The remaining principal on the loan needs to be below $729,750. Also, they must pay above 31% of their gross monthly income on monthly mortgage premiums. (This amount includes principal interest, property taxes, house insurance, and homeowners association fees.)
If you can no longer make your monthly mortgage payments, the government suggests that you confer with a UD-approved financial counselor. Never pay for a financial consultation, because reputable counselors will provide their services free of charge. It will be easier to find these counselors now than it was in the past, because of increased monetary support from HUD and the U.S. Treasury. Also note that if your total debt (car loans, credit card debt, alimony and child support) exceeds 55% of your gross monthly income, you have to work with a HUD-approved counselor before you are eligible to modify your home loan.
The first step is to give proof of your gross monthly income. You'll need to fill out and submit a 4506-T, a copy of your most recent tax return, and two pay stubs. If you are unemployed or self-employed, a reputable third party has to provide a letter of verification. That information is used by lenders to determine what monthly payment would be affordable for you at blow 31% of your gross monthly income.
Why would lenders do this rather than foreclose on your house? Because with the government modification plan, they will get an incentive bonus of $1,000 per every eligible referral to the modification program. If, after the modification, borrowers remain up-to-date with payments, lenders get further incentive payments of $1,000. The U.S. Treasury has implemented a standard set of rules and procedures to modify home loans known as the Standard Waterfall. The Standard Waterfall requires lenders to first reduce the interest rate, then extend the life of the loan (if necessary), and finally forbear loan principal. After doing this, if they determine that the incentive payments will mean that a loan modification is more profitable than foreclosure, they will proceed with modification. Obama's home loan modification presents a win-win situation for everybody involved.
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