What Is a Mortgage Rate Modfication?
A mortgage rate modification is simply a change is the mortgage contract so that the homeowner is able to continue making payments. Mortgage rate modifications are not the same as refinancing, because refinancing involves the entire process of beginning a new mortgage contract--complete with closing costs--while a rate modification is just the change of the rate and usually without closing costs. The federal Making Home Affordable program makes mortgage modifications a priority for homeowners who are struggling to make payments.
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Qualifications
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Mortgage rate modification is not available for everyone, and the federal guidelines have specific eligibility requirements. Homeowners must be requesting the modification for the property that is their primary residence and must have a loan price that is less than $730,000, as of May 2010. Additionally, the mortgage must have been obtained before Jan. 1, 2009, and the loan provided through the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), both of which provided loans through a variety of lenders. The monthly mortgage payments must be more than 31 percent of the homeowner's monthly income.
Process
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The process of requesting a mortgage rate modification is simple, although it does require time. The homeowner must complete the Request for Modification and Affidavit (which indicates the homeowner's evidence of personal hardship--loss of job, loss of family member and so forth), the tax form 4506T-EZ, and a proof of income in the form of a pay stub or a bank account statement showing monthly deposits of the same (or nearly the same) amount. The homeowner should then make personal copies of all these documents and send the originals to his lender for review.
Benefits
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The Making Home Affordable program requires that the modification bring the payments below 31 percent of gross income to provide more money for living expenses each month. Additionally, a mortgage rate modification ensures that the homeowner is paying less money in interest each month. Should the homeowner find himself in a better situation in the future, he has the opportunity to expand payments and pay off the loan sooner.
Disadvantages
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While the Making Home Affordable program is designed to assist struggling homeowners, it does have some disadvantages that can create more problems for homeowners. The time required for a lender to review and approve the documents can take months, which can be difficult for a homeowner who is already having trouble making mortgage payments. Also, many struggling homeowners do not qualify for the program.
Expert Insight
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The Making Home Affordable Program provides services for homeowners, but real estate experts also recognize the downside. As a result, many recommend that homeowners begin by contacting their lender directly to request a modification. Many lenders will refuse the modification without the support of the program, but others may consider the idea. If a mortgage rate modification ensures that the lender will keep a customer--instead of losing him through foreclosure or refinancing with another lender--the lender might be willing to listen.
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