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Understanding Mortgage Loan Modification: Most Frequently Asked Questions


Homeowners today face many challenges, including meeting their monthly mortgage payments. Those homeowners who find themselves in difficult straits now have a way to potentially resolve their problems by making use of a mortgage loan modification program. Previously, if a homeowner found they were not able to make their mortgage payments, there were few options available to them. For most homeowners in such circumstances, the first option was foreclosure.

Fortunately, homeowners today have an opportunity to avoid that option, yet they are likely to still have numerous questions about home loan modification.

How Did the Home Loan Modification Program Develop?

The mortgage loan modification program is part of the Making Home Affordable Plan. The plan went into effect on February 10, 2009. Homeowners who meet the criteria for the program have the opportunity to change the terms of their mortgage loan so they have a chance to remain in their homes.

Who Qualifies for the Home Loan Modification Program?

Individuals who live in a home that they owe a mortgage on will qualify for the loan modification program. The mortgage loan must have been signed prior to the beginning of 2009. In addition, the loan cannot be for more than $729,750. The homeowner's gross monthly income will need to be verified prior to obtaining a loan modification.

How Does the Home Loan Modification Program Work?

The first step is calculating the percentage of the homeowner's gross monthly income that is put toward paying the mortgage. Under the home loan modification program, homeowners who are eligible can potentially have their mortgage payments modified so that payments do not exceed 38% of their total gross monthly income. The government can then match the reduction from the lender in order to lower the loan payment to 31%. After a new monthly mortgage payment has been agreed upon, it will remain in effect for a total of five years.

Who Pays for the Home Loan Modification Program?

Such modifications are made possible through the Homeowner Stability Initiative. Taxpayer funds amounting to $75 billion will be spent in order for home loan modifications to be made available. It is anticipated that between 3 and 4 million homeowners will be assisted through this plan.

Are there Any Limitations to this Plan?

At the current time, the program is not available to house flippers and investors. In addition, a credit check must be performed on all program applicants to ensure they actually live in the home before the modification will be approved. Only Freddie Mac and Fannie Mae insured loans are eligible for the program. In the event the loan is insured by another company, such as a subprime loan, modification is not available.

How do Homeowners Apply for the Program?

Homeowners who are interested in applying for the program should contact a financial counselor who has been approved by the US Department of Housing and Urban Development. Such not-for-profit groups are able to provide applicants with free financial advice as well as help applicants to determine the next step that should be taken.

What Else do I Need to Know about the Program?

Only first mortgage are eligible to be refinanced under the program. If you have a second mortgage, it must stand as is. Homeowners can potentially finance up to 105% of the current value of their home.

Who Can Benefit from this Program?

This program is intended for individuals who:

Owe more on their home than it is worth
Have an interest rate that is higher than the current interest rates
Have an adjustable rate mortgage that has either re-set or will re-set soon
Would like to refinance but are not able to do so because their loan to value ratio is higher than 80%
Are not able to refinance because of reduced monthly income

What are the Benefits of this Program?

There are numerous benefits related to this program, including lower closing costs, more lenient underwriting guidelines, the ability to possibly avoid an appraisal and the ability to avoid mortgage insurance.

For homeowners who have found themselves in a difficult situation and are concerned they could potentially lose their home, this program can provide welcome relief, allowing homeowners the opportunity to remain in their home and avoid the prospect of foreclosure. If you do find yourself in this type of situation, remember that it is always better to go ahead and apply for the program as early as possible rather than waiting until the situation becomes even worse.


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