Finally, lenders will apply what's know as a "net present value" test to determine whether a loan modification will provide the lender with a better financial outcome than a foreclosure.
In this test, the lender calculates how much it would cost to modify the borrower's mortgage to a debt-to-income ratio between 31 percent and 38 percent. Participating lenders are required to offer the deal if the cost of modifying the loan is less than the cost of foreclosure.
Who doesn't qualify?
Borrowers who do not qualify for the Home Affordable Modification program include:
- Owners of vacant or condemned properties.
- Borrowers who owe more than the maximum loan limits.
- Borrowers who can easily afford their current payment but whose property value is less than the money they owe on the mortgage.
How can I find out if I meet the qualifications?
Talk to your lender or visit FinancialStability.gov, the government's official Web site for programs associated with the Making Home Affordable plan. A list of participating lenders will be available at the government site as contracts are signed with the lenders.
Are there costs and fees associated with this program?
There are no costs for the borrowers.
What documents will I need to prove that I'm not able to refinance and that my financial condition is dire enough to warrant a mortgage modification?
Borrowers need to provide a signed Form 4506-T -- "Request for Transcript of Tax Return" -- and a copy of the most recent tax return on file for all borrowers.
Borrowers also need to provide their two most recent pay stubs. Self-employed borrowers' income will be verified through third-party documentation that provides reliable evidence of income (bank deposits, freelance paychecks, etc.)
Borrowers will need to sign an affidavit of financial hardship. Recent bank account and investment statements are needed to prove that you do not have sufficient assets to make the monthly mortgage payments.
How does the lender determine how to modify my mortgage?
The lender needs income verification to determine if the borrowers have a "front-end" debt-to-income ratio of 31 percent or greater. The front-end ratio is the ratio of monthly gross income (income before payroll deductions) to monthly principal, interest, property taxes, property insurance, and homeowner association and/or condominium payments.
The lender also adds all of the following to the unpaid loan amount:
- All accrued interest.
- Past due taxes and insurance.
- Delinquency charges paid to third parties (such as inspections on the property).
- Escrow advances paid by the lender, but not including late fees or default fees charged by the lender. (Those fees are forgiven under this program.)