Exploring the Best Loan Modifications: HAMP vs Non-HAMP Programs
If you are having trouble paying your mortgage, you might be worrying about whether your lender is going to foreclose on you. This is obviously something you want to avoid, as it can lead to your home being taken from you and your credit score being hit significantly.
Luckily, there are some options available to struggling borrowers who find themselves in financial hot water. Depending on what type of mortgage you have, and who your lender is, you could have various loan modification programs available to you.
These programs are designed to help borrowers avoid foreclosure if they’re having trouble meeting their mortgage payments. In this process, the original mortgage terms will be modified in some way to provide financial relief to you.
The goal of loan modification programs is to provide homeowners with financial relief so they can avoid the foreclosure process, which is not only damaging to them but challenging and undesirable to lenders as well.
Here is some more information about loan modification programs and how they work.
Benefits of Loan Modifications
Loan modifications can be very beneficial to struggling homeowners. Making adjustments to the current terms of your loan can result in lower payments, which can help you afford your daily life and, ultimately, avoid foreclosure.
Sometimes, you could also obtain more beneficial long-term financial relief from loan modification programs, too. This could come in the form of interest rates that are lower than what they were in your original loan.
Depending on the loan modification you participate in, you might qualify for a reduced monthly mortgage payment that equals no more than 31% of your gross monthly income. This means that if you earn $50,000 per year before taxes, your monthly mortgage payment could be capped at just less than $1,300.
How the loan modification programs work depends on the specific program. No matter how it works, though, this program often allows borrowers to stay in their homes for longer and avoid foreclosure in the process.
Home Affordable Modification Program (HAMP)
The Home Affordable Modification Program, also known as HAMP, was created in 2009 to help struggling homeowners modify their mortgages. The program was created at the height of the housing market crash, and was expanded again in 2012 to aid even more families who needed help.
The goal of the program is to offer borrowers the ability to lower their monthly mortgage payments if they’re at risk of being foreclosed. It’s not just about creating a lower monthly payment in the near term, but also offers a repayment plan that is sustainable for them in the long term.
To qualify for the program, borrowers have to prove that they’re experiencing financial hardship, and that they’ll be able to afford the modified monthly mortgage payments.
How HAMP Works
HAMP provides a number of different benefits to struggling borrowers. It modifies existing mortgages by extending the loan terms, reducing interest rates or adding late payments to the principal balance.
The federal government provides incentives to mortgage servicers to encourage them to participate in the program.
HAMP uses what’s known as a “waterfall” process to determine the specific loan modification to use, so that it achieves a targeted front-end debt-to-income ratio that’s no greater than 31%.
HAMP Eligibility and Requirements
There are certain eligibility requirements that the federal government set for borrowers to qualify for the HAMP program.
The loan in question must have originated before 2009, be the first lien on the property and be an owner-occupied home. The outstanding principal balance of the loan must be $729,750 or lower. Plus, the principal, interest, property taxes and homeowners insurance must be more than 31% of the borrower’s gross monthly income.
To apply for the program, borrowers have to completely document their income, as well as sign an affidavit of financial hardship that shows they are having trouble making their mortgage payments. In addition, they can’t be more than 5% “underwater” on the home, can’t be delinquent on the mortgage or facing imminent default.
Once an application is made, the HAMP program will verify the borrower’s income to determine their eligibility. In some cases, the borrower may be required to pay mortgage insurance, depending on their situation.
Non-HAMP Loan Modification Options
With the HAMP program expiring in 2016, many homeowners were left without an obvious and straightforward loan modification program. But, depending on what type of mortgage you have, there could still be plenty of options available to you.
FHA Loan Modification Program
FHA loans, backed by the Federal Housing Administration, are some of the most popular mortgages available today. A loan modification program is available for borrowers who have an FHA loan and are struggling financially.
Under this program, it’s possible to modify FHA loans by extending the term of the loan, reducing its interest rate and/or adding late payments to the principal balance.
Some borrowers may also qualify for a “partial claim” option, which could reduce their outstanding principal balance by as much as 30%.
Fannie Mae and Freddie Mac Flex Modification Program
Mortgages backed by Fannie Mae and Freddie Mac also potentially qualify for the Flex Modification Program. This program is aimed at borrowers who have conventional mortgages avoid foreclosure.
This program is actually available to borrowers who are delinquent on their mortgage, as long as they aren’t more than 60 days late on payments. The Flex Modification Program could extend the current mortgage term to 480 months.
Those extra 10 years on the mortgage could significantly lower the monthly payment, though it could result in the borrower paying a larger overall amount if they see the loan through until the end.
VA Loan Modification Program
The Department of Veterans Affairs backs mortgages like the FHA does, only for veterans and their spouses. The VA also has a loan modification program that allows outstanding payment amounts that are past due to be added to the outstanding principal balance.
In doing so, borrowers can get an entirely new payment schedule, which results in a lower monthly payment. In some cases, the monthly payment can be reduced significantly through an extension of up to as much as 10 years on the life of the mortgage.
Comparing Loan Modification Programs
While all of these loan modification programs have similarities, there are many differences, too.
HAMP was a federal program that was available to any homeowner who qualified, regardless of the type of mortgage they have. Non-HAMP programs are offered by either individual government agencies or lenders, and apply only to those types of loans.
Each of these loan modification programs have different rules and regulations to qualify. If you are having trouble paying your mortgage, the best thing to do is reach out to your mortgage service company and discover your options for a loan modification.
Choosing the Best Loan Modification Program for Your Needs
Sometimes, you’ll have a choice when it comes to loan modification programs. Other times, you may be locked into only one option.
That’s why it’s important to figure out what your options are so that you can make the best choice for you. You’ll want to consider your current financial situation, the type of mortgage that you have as well as the eligibility requirements before applying for a loan modification.
In addition, compare all the benefits and drawbacks of each program available to you so you can make the most informed decision possible.
Alternative Mortgage Relief Options
It’s possible that a loan modification program might not be available to you, or you may decide that the options that are available to you simply aren’t very attractive.
If this is the case, you could consider alternative options to receive mortgage relief.
One such program is called the Home Affordable Refinance Program, or HARP. The Federal Housing Finance Agency created the program to aid homeowners who are underwater on their mortgages — meaning their home is worth less than the amount that they still owe on it.
The program helps borrowers refinance their mortgages with a lower interest rate and lower monthly payments that makes it more affordable for them, and sets them up for long-term financial success.
Investigate Loan Modification Programs if You’re Struggling Financially
If you’re struggling financially and having trouble repaying your mortgage, know that you are not alone. Also know that there are options available to you that would allow you to change the terms of your current mortgage and avoid foreclosure.
Various loan modification programs are available that could provide you with financial relief and allow you to stay in your home.
HAMP and non-HAMP programs offer different benefits and eligibility requirements, so it’s best for borrowers to compare the pros and cons to see which option might be best for them.
