The lender then determines how much of an interest rate reduction is required to get the borrowers' mortgage payment to a 31 percent debt-to-income ratio. The interest rate floor is 2 percent. If the debt-to-income ratio is more than 31 percent even after adjusting the rate down to 2 percent, the lender will need to find other ways to modify the loan.
Other options for modifying the loan include:
- Extending the length of the loan up to 40 years to reduce the level of the mortgage payments.
- Forbearing the principal by delaying payment to a future date.
- Forgiving some of the principal. Under terms of the program, the lender is not obligated to offer this concession.
What happens if the lender approves a loan modification under this program?
You will initially be on a three-month trial modification at the new interest rate and payment. If you are still current at the end of three months, a modification agreement will be signed that includes escrow payments for taxes and insurance.
Is the new interest rate fixed for the rest of the loan?
If the modified interest rate is below the market rate on the date of the modification agreement, the modified rate will be fixed for a minimum of five years.
Then, beginning in the sixth year, it may increase no more than 1 percentage point per year until it reaches the market rate interest rate on the date of the modification. For example, if mortgage rates are at 5.8 percent on the date of the modification agreement, your interest rate will rise by 1 percent each year until it reaches that level.
Is there a possibility of a balloon payment?
Yes. If the lender defers payment on the principal, the principal will have to be repaid when the loan is paid off or refinanced, or when the house is sold.
What documents will I need to prove that my home is my "primary residence"?
Property owner status must be verified through a credit report.
When does the program expire?
New borrowers will be accepted until Dec. 31, 2012.
What are my options if I'm told I don't qualify?
Borrowers who do not qualify (or whose lenders do not participate in the program) are encouraged to discuss all other loss mitigation options with their lender. These may include refinancing or loan modifications outside the Home Affordable Modification program and local resources such as rescue grants and loans.
Homeowners who cannot keep their home may also explore options other than foreclosure, such as short sales and deeds in lieu of foreclosure.
What if I have a second mortgage?
You still may qualify as long as the second lender agrees to subordinate to the new first mortgage. In other words, the second lender has to agree that in the case of a default, the first mortgage would be paid before the second one.
The government plans to offer incentives to lenders to extinguish second liens on loans modified under the program.