Over the past two years we have heard a lot about loan modifications. Many loan modification ‘companies’ have been promising homeowners extraordinary savings on their monthly payments as well as reduced principal and other benefits. But what can a homeowner actually expect? And what exactly is a loan modification?
A loan modification is precisely what its name describes. It is a permanent modification of the terms of your existing mortgage. Once you are approved for a modification and all of the final documents are signed, your mortgage will be permanently modified to reflect the new terms. There is a federal modification program known as the Home Affordable Modification Program or HAMP. The HAMP program helps homeowners who are struggling to keep their loans current or who are already behind on their mortgage payments. Through the HAMP program, qualified homeowners will receive a reduced monthly payment equal to no more than 31% of their monthly income and will fix their interest rate for a minimum of five years increasing no more than one percentage point per year in the sixth year until being capped at the market rate at the time the modification is done. Loans do not have to be owned or guaranteed by Fannie Mae or Freddie Mac in order to qualify. If for some reason a homeowner does not qualify for a HAMP modification, most lenders offer internal modification that are structured and processed by the bank itself. Internal modifications can have terms just as beneficial as those offered under the HAMP and are a good option for homeowners with specific disqualifications under HAMP.