Many homeowners who are behind on their mortgage payments will soon be offered loan modifications to reduce their monthly payments without having to submit financial documentation to the lender.
Starting in July, the Federal Housing Finance Agency, or FHFA, will require servicers to offer streamlined loan modifications to borrowers who have loans that are owned or backed by Fannie Mae or Freddie Mac and are eligible for the program.
In order to qualify for the streamlined modification program, homeowners must:
- Be at least 90 days delinquent but no more than 2 years.
- Have a mortgage that was taken out at least a year ago.
- Owe 80 percent or more than what the property is worth.
Borrowers who qualify will receive letters specifying their new monthly payments based on an extended repayment term of 40 years and a reduced interest rate of about 4 percent. On average, payments will be reduced by about 30 percent, according to the FHFA.
The modification requires a three-month trial period and becomes permanent once the borrower makes three payments under the new terms. To accept the offer, borrowers can simply call their servicers to say they will make the first trial payment by the due date.
According to the FHFA guidelines, the modification doesn't waive the late payments that have accumulated over the months when you weren't paying the mortgage. The past-due balance will be added to the back of the loan. But since the loan is being stretched to 40 years, it is likely your monthly payment can still be reduced.
Borrowers who owe more than 115 percent of the value of their homes may receive a forbearance on part of their loan balance. The FHFA says it can put up to 30 percent of their total mortgage balance on forbearance, without interest, until the end of the 40-year term or until the house is sold.
Should you say yes?
This streamlined program sounds like an easy option, especially if you have heard about the amount of paperwork required for a loan modification and the numerous complaints related to documents getting lost during the process.
"The paperwork on today's modification is overwhelming," says Howard Ullman, an attorney and owner of Family Counseling Law Firm in Deerfield Beach, Fla.
The streamlined program is a quick way to skip the hassle, avoid foreclosure and reduce your monthly payments.
But you could likely get better terms and incentives if you qualify and can provide the financial hardship documentation required for a loan modification through the Home Affordable Modification Program, or HAMP.
However, entering one program doesn't hurt your chances of being approved for the other.
If you apply for HAMP and are rejected, you could still participate in the streamline program. You may also start the streamline program while you submit the paperwork to your servicer to see if you qualify for an alternative program such as HAMP.
Will the streamline program work?
This program will likely help homeowners who have loans owned by Fannie and Freddie, but many struggling homeowners don't have loans owned by one of these entities, Ullman says.
"However, there has to be a starting point to resolving this continuing crisis, and if this is that start, then wonderful. Of the hundreds of people we see, there is a growing desire to retain properties only if the financial restructuring makes sense."
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