The 3 Steps for a Home Affordable Modification
(Whether You Like It or Not)
In writing hardship letters for a living, I often get requests from customers that look like this:
I’d like a reduction in my principal of approximately $30k, and then I’d like to pay off my loan over 40 years. I can pay 3% on the remaining principal for the first year, 4% for the second year, and then they can raise it to 5% for the remainder of the loan. This will really help me get through this hard time and enable me to keep my home.
Sound good? Sure, I’d love that, too! But with Obama’s loan modification program, that is not what will happen.
There are a variety of tactics your lender can use to lower your payments, but there is also a great deal of confusion regarding how these adjustments are applied. True, lower interest payments are usually part of a loan modification. However, extending terms and providing for principal forbearance (delay, rather than forgiveness) are less common, and are only done when interest deduction, alone, won’t do the trick.
Many people don’t seem to realize that when their lenders elected to participate in the Home Affordable Modification Program (HMP), they also agreed to follow a very specific step-by-step process to get your monthly mortgage payments down to where your debt-to-income (DTI) ratio is as close as possible to 31%, without going under 31%. (Note that your “monthly mortgage payment” includes the monthly payment of principal, interest, property taxes, hazard insurance, flood insurance, condominium association fees and homeowner’s association fees, as applicable, but does not include PMI.)
Assuming you qualify, your lender must follow specific guidelines and perform the following strategies, in this order:
1. Reduce the interest rate. They’ll go as low as possible to hit 31% DTI, but the lowest they can go is 2%.
2. If they’ve gone all the way down to 2%, and still haven’t hit 31% DTI, then they’ll extend the term of the loan. They can extend it up to 480 months (40 years).
3. If that still doesn’t do the trick, then they must provide for principal forbearance to meet the target DTI. This means that they would carve out part of what you owe and not have you make payments on that until a later date (but it is never forgiven). Forbearance, under this program, is still very generous. The principal forbearance is non-interest bearing and non-amortizing. The amount of principal forbearance will result in a balloon payment fully due and payable upon you selling the home, or paying off the other principal amount.
So, while you may have created your own strategy for reaching payments that you can afford, if it doesn’t follow the above steps, it won’t matter how ingenious your ideas were.
Of course, in order for any strategy to be agreed to, you must have a valid hardship, and a decent hardship letter. So, follow Todd’s advice in Hassle Free Hardship Letters, and, if you need extra help, I can write your letter for you. Todd’s also posted a downloadable hardship letter sample to get you started.
Becky DeGrossa makes her living by writing and by teaching about writing. She accidentally became educated about writing hardship letters because she had clients that needed them and didn’t know where to start. Since then she’s written hundreds, and recently, the letters have gravitated toward highlighting her clients’ qualifications for the new government programs for loan modification, forbearance, etc. Becky will be writing periodic articles for Truth in Foreclosure. You can find more information about her and her services at http://www.hardshipletters.info.
How to Write a Hardship Letter Conference Call
Join us at 9 pm EST this Thursday (May 28th) for a conference call where Todd and Becky how to write a hardship letter to include:
- When they say to provide *details* of your hardship, what do they mean? How detailed should I get?
- What constitutes a legitimate hardship?
- Are there some aspects of my “story” of how I got here that I should leave out?
- My lender’s instruction about my hardship letter says to only tell what happened the last 6 months, but my situation is more complicated than that? What should I say?
- If I am still current on my payments, is that going to hurt me? Should I miss a payment to get my lender’s attention?
- Should I include what I’ve already done to improve my ability to pay or not?
- Should I include actual numbers (such as debt-to-Income ratio, salary, mortgage payment, value of my home) in my letter?
There will also be time for your questions at the end. If you’re interested in attending the call or it having access to a recorded version of it, please go here to register.
June 8th, 2009 at 12:22 pm
I was just offered a trial patment plan of $2590.00 a month with income of $5600.00 per month. I’m not sure but I do not believe WAMU is aware of these guidelines. They offered us this trial payment plan for the next three months and if we do not make the payment we will go back to foreclosure. Who do I contact about this? I do not understand how they expect us to give up over half ov what we bring in and that is getting lower every month because we are self employed. What do I do, not pay for something else just to pay them.
Todd Reply:
June 8th, 2009 at 7:32 pm
Call them and ask them to show you in writing the numbers they used to qualify you for this plan. I checked the Making Home Affordable web site and WaMu is not listed as a participating lender. However, if you have a Fannie or Freddie loan the WaMu services, you’re in luck. Go to the site if and follow the directions to find out if your loan is owned by Freddie or Fannie.
If that doesn’t work (or you don’t have a Freddie/Fannie loan), your next step would be legal remedies like a loan audit or getting an attorney that’s familiar with foreclosure law to help you. If you need a reference, check out the National Assoc of Consumer Advocates.
I hope it helps.
February 26th, 2010 at 10:42 am
We were served foreclosure notice on February 14th. We qualify for and have tried to get a modification. We were denied the first time because we didn’t make enough. We were denied the second time for making too much. We are self employed (full commission) & projecting what our sales income will be over the next several months. How do we stop the foreclosure process while we work with them to see if we can get a modification?
February 26th, 2010 at 10:47 am
Also thought you would want to know that we have a fannie loan through bank of america.
Todd Temaat Reply:
February 28th, 2010 at 12:13 pm
The short answer is: you don’t stop the foreclosure.
The longer answer is: the foreclosure process and the modification process are two separate things and they normally proceed at the same time. However, changes may be coming soon (pay attention to our articles this week for more). In addition, it’ fairly common for servicers to only go far enough down the foreclosure path to make sure they don’t put themselves in a corner legally. They’ll file all the requried paperwork and talk to the courts if necessary to get the process started and then just sit on it waiting to see if your modification is approved. They do this to protect their legal right to foreclose at any time since you are in default.
Hope that helps.