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Do I Qualify For A Loan Modification? 

March 2011 - By Catherina Chang Watters and Mark Nejame

Under Obama's Making Home Affordable (MHA) Plan, every Homeowner who is struggling to make mortgage payments and is in financial distress is entitled to apply for a loan modification. The latest MHA data reveals that Homeowners in permanent loan modifications have seen their monthly payments cut by a median of 40%. That is over $4.5 billion in reduced mortgage obligations in the last year. It's no wonder more and more Homeowners are asking "Do I qualify for a loan modification?"

In a loan modification, a Homeowner is asking the bank to lose money on the original loan and modify it at new terms. If it is in the Lender’s best interest to modify the loan and the Homeowner can show they can stay current on the new payments, then the Lender is more likely to approve the modification. An increasing number of Homeowners are at risk of losing their homes, not because they paid over market value, or because they are living beyond their means, but because the market decline combined with financial hardship has rendered their mortgage obligations impossible to meet.

Low income, moderate to middle, and even high income homeowners are struggling to stay current on their loans. Due to the housing market decline, many people now owe more than their home is worth. So what is the incentive for Homeowners to remain in their homes? For one, the government is requiring Lenders to reduce interest rates down to as low as 2%, and in some cases to permanently reduce the principal in order to achieve a mortgage payment that is no more than 31% of the Homeowner's gross (pretax) monthly income; thereby making their payments affordable.

Housing Affordable Modification Program (HAMP) is just one of the programs available to Homeowners under Obama's Plan. To qualify for HAMP, you must:

  1. occupy the house as your primary residence;
  2. have obtained your mortgage on or before January 1, 2009;
  3. have a mortgage payment that is more than 31% of your monthly gross (pretax) income;
  4. owe up to $729,750 on your home; and
  5. show a financial hardship and are either delinquent on your payments or are in danger of falling behind.

This criteria is for guidance only. For example, Homeowners with jumbo loans are not excluded from these programs. Every Homeowner has a unique situation that must be individually evaluated. If you don't qualify under MHA, you may still be able to negotiate a loan modification under one of the Lender's In-House programs.

You have the option to contact your Lender directly, but don't be surprised if you are instantly denied. The process may appear as simple as filling out a form and answering some financial questions; however, it is difficult to know exactly how each Lender will process the information you submit in determining whether to approve your modification. You may have also noticed several companies advertising Foreclosure Rescue and Loan Modification Services, but I would be wary, as many are operating illegally due to a recent change in legislation. Beware of scammers who pretend to have direct relationships with your Lender and guarantee specific results.

The safest approach is to contact an experienced attorney to evaluate your financial and legal situation and help determine if a loan modification is the best legal strategy for you.

Catherina Watters and Mark NeJame contributed to this article