How Does the Government Loan Modification Work?


The goal of the government loan modification program is to allow homeowners to reduce their monthly mortgage payments to prevent foreclosures. The Home Affordable Modification Program (HAMP) works with your lender to modify the terms of your existing mortgage loan. Although it is a government program, it is the lender that approves your loan modification. Different lenders have different rules regarding qualifications for a loan modification, and before the lender approves the loan modification, the borrow must meet these requirements.


A loan modification is any type of alteration to the original or latest contract signed by the lender and the homeowner. You can modify the terms of the repayment, monthly payment amount, interest rate or the term of the loan. When negotiating your modification with your lender, you should only agree to a loan modification you are certain you can afford to pay.


To qualify for HAMP, the house associated with the mortgage loan has to be the primary residence. In addition, the mortgage loan has to have a principal balance of less than $729,750, and the current monthly mortgage payment has to be more than 31 percent of your gross monthly income. Also you must have closed your mortgage loan prior to Jan. 1, 2009. Finally, you have to convince the lender of your hardship and that you are not able to keep the property under the terms of the current mortgage contract.


Hardships include major life event changes such as unemployment, health problems or deaths in the family. If you have experienced a major life event change, you should contact your lender and inquire about your eligibility to modify your existing mortgage loan under the HAMP program. You also must write a letter and explain every detail of this hardship. The letter should explain how you arrived at your current situation and how much you can afford to pay monthly. If you are unemployed, you must explain your source of any income.

Net Present Value

Before the lender modifies your mortgage loan, it performs a net present value test. The exact formula used by lenders for the net present value test is not known. However, the test determines the basic profitability for the lender of modifying your existing mortgage. You will either pass or fail the net present value test, and your lender will not approve a loan modification if you do not pass this test.

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