The federal government reports that, as of January 2011, most major lenders conduct trial and permanent mortgage modifications under the President's Home Affordable Modification Program. The loan modification process contains numerous crucial steps. Once your bank approves a modification for you, several things take place that you need to be aware of.
For all intents and purposes, your lender will not approve a mortgage modification if it cannot reduce your monthly payment to no more than 31 percent of your gross income. To achieve this objective, lenders start by reducing your mortgage's interest rate to as low as 2 percent. If that does not achieve the desired result, lenders can extend the term of your loan and defer part of the principal balance. After HAMP approval, you'll realize a lower monthly payment, which is probably a major reason why you sought assistance in the first place.
With a reduced payment, you must proceed through a trial modification. Under a HAMP trial, you need to make three consecutive on-time payments. During this time, your lender only tentatively approves your modification. It becomes official once you satisfy the terms of the trial and provide the required documentation regarding income and expenses.
If you show that you can handle your new monthly payment during a HAMP trial, your bank officially approves a permanent modification. At this juncture, the terms of your original loan change -- your bank "modifies" them -- according to the agreement that preceded your trial period.
Interest Rate Changes
Your new interest rate, if it is below the market rate on the day you execute your HAMP contract, stays in effect for 5 years. As the Making Home Affordable website notes, in the sixth year, the interest can begin to increase by no greater than 1 percent per year until it reaches the market interest rate on the day you entered into your permanent modification. Your interest rate, under this scenario, cannot exceed the original market rate. If your rate was modified at a higher rate than the original market rate, the modified rate must stay in effect for the entire duration of the loan. When and if your interest rate fluctuates, you may see considerable changes in your monthly payment due.
When your lender cannot reduce your mortgage payment to 31 percent of your income or less, HAMP guidelines give it the option of forbearing a portion of your principal. If your lender takes this route, you can expect a balloon payment, equal to the deferred amount. This means that when you sell your home, refinance your loan or pay off your modified mortgage, you must make this balloon payment.