The first thing your loan servicer will do to see if you are eligible for the loan modification program is establish if the loan you have meets the terms for loan modification and if it does:

They will ask about your current income, what assets you have, if any, and any ongoing expenses. What they want to know is whether you will be able to make any new payments that will be due after loan modification by understanding your specific circumstances. Anything you tell them will eventually need to be supported by documented evidence i.e. tax returns, pay stubs etc.

They will also need to establish that your monthly first lien mortgage repayment does not exceed 31% of your gross monthly income.

If you get this far they will add past charges (any tax, interest, insurance and costs that your lender paid to 3rd parties on your behalf to the loan balance, effectively consolidating your debts into the mortgage balance. Note this does not include late fees, charges you have received as a result of being late on payments, these must be written off.

They will then calculate the interest rate required to bring your payments to a maximum of 31% of your gross monthly income.

Then there will be a value test to establish if the cost of the loan modification is less costly for the investor than the other option of not modifying the loan. The government’s incentive payment is also taken into account when applying the value test and people who have a lot of equity or whose incomes are very low compared to their home value are unlikely to pass this test.

Assuming you make it this far the next hurdle is to make the first 3 months of payments at the new repayment level. If you do this the loan modification is then made a permanent arrangement that will keep your repayments at a fixed rate for 5 years after which it will be capped at a  low rate for the life of the loan remaining.

You will of course have to sign the modification agreement and associated documentation attesting all information is true and accurate. Any false declarations will be a violation of Federal Law which is a serious offense so make sure you are upfront and truthful otherwise be prepared to suffer the consequences.

The first general rule is that you should be struggling to make your mortgage payments if you are meeting your mortgage payments comfortably then you are not going to qualify. So what exactly do the stimulus package rules say for loan modifications: -

• You have to be in residence of a single family home
• Your total repayments including capital repayments, interest, tax and insurance must be more than 31% of your gross income (from March 2008)
• Your mortgage balance must not exceed $729,750 for a single unit but for multiple units the amount can be up to $1,403,400 for the maximum 4 units
• Your mortgage pre-dates the 1st of January 2009

What you should also know: -

The scheme ends on the 31st of December 2012

Not all the mortgage lenders are participating in the scheme, despite there being incentives in place to encourage them to do so.  Also if you are trying to secure the deal on a home that you have bought as an investment and it is not your primary residence then you will not qualify.

Some loan agreements and financing preclude you from taking part in the scheme and ultimately it is the loan provider that decide whether your particular circumstances are suitable for the scheme or if offering you the loan modification is not in their best interests or the  best interests of their investors. Which means in a nutshell that getting on the scheme is not a given even if you meet all the other qualifying criteria.

Advantages over the mortgage refinancing option:

• it is unlikely that you will be required to go through a new credit check
• processing the application should be much quicker than the mortgage refinancing option.

This is the 2nd of 2 prongs of  Obama’s initiative on giving aid to people facing financial hardship over home ownership, the option will not suit everyone and any changes to you current arrangement should be carefully considered and the proper advice regarding your specific circumstances should be taken into account.

For the mortgage refinancing details please refer to my previous post.