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The key components of Obama's foreclosure-avoidance program are loan modification and loan refinancing. The details of this provision has created an extraordinary opportunity for millions of people to either re-finance or modify their existing mortgage.
What is Obama's loan modification plan?
President Obama recently announced a $75 billion initiative called the Homeowner Affordability and Stability Plan (HASP). One of the principal tenets of the plan is called the Making Home Affordable initiative. This initiative is comprised of two parts:
- The Home Affordable Refinance program which will help homeowner's who's falling home values have prevented them from refinancing because their current loan-to-value ratios are higher than the normal 80% figure and who's mortgage is owned by Fannie Mae or Freddie Mac.
- The Home Affordable Modification program which is designed to reduce monthly mortgage payments for people who are close to foreclosure by modifying their mortgages and lowering the payments on their loans. Their loan does not need to be owned by Fannie Mae or Freddie Mac.
Incentives for Mortgage Lenders and Homeowners
In the current economic environment, mortgage providers have been reluctant to refinance loans. Thus the "Making Home Affordable" initiative actually provides cash incentives to mortgage lenders and loan servicers.
Providers will receive an up-front fee of $1,000 for each eligible modification that meets the guidelines (outlined below and full details here) established under this initiative. They will also receive monthly cash incentives (as long as the borrower stays current on the loan) of up to $1,000 each year for three years.
Further, to help lenders remain focused on borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage lenders, if they modify at-risk loans before the borrower falls behind.
Finally, homeowners who make their mortgage payments in a timely manner are eligible for $1,000 reductions in the prinicipal of their loan every year for five years.
Overview of Home Affordability Modification Guidelines
- Loans must have originated on or before January 1, 2009.
- Mortgages must be for a single-family residence with a loan balance no greater than $729,750.
- Loans can only be modified once beginning March 4, 2009 through December 31, 2012.
- Home cannot be vacant or condemned and must be a primary residence—not investor owned.
- Interest rate can be lowered to as low as 2 per cent and the term of the mortgage can be extended to a maximum of 40 years in order to maximize the reduction in loan payment.
- Borrowers will need to provide an "affidavit of financial hardship", their most recent tax return, and two recent pay stubs.
- Service providers will be required to follow a sequence of steps that modify the loan in order to reduce the monthly loan payment to no more than 31% of gross monthly income.
- Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years
Loan Modification Not for Everyone
There are some situations where a loan modification is not necessarily the best option. For example, if the lender is willing to reduce the payments, but your home is worth substantially less than the value of the mortgage and you don't plan on living their long enough to reduce your negative equity, you might be better off with a short sale.
Loan modification programs are typically designed for homeowners who are having difficulty making their mortgage payment, but who don't qualify to refinance their mortgage. A loan modification is different than a refinanced mortgage which trades in one mortgage for another one. It also differs dramatically from foreclosure, a short sale, or a deed in lieu.
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.
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