What is a good loan program?

What Is a Loan Modification Program?

• Answer:

  The loan modification program is a plan from the Obama Administration to help combat the high rate of foreclosures that began occurring in 2008. People who traditionally could not qualify for mortgages got them anyway because of looser standards in the industry and creative mortgage options. The result was a spike in foreclosures. Loan modifications are an attempt to stem this tide. History The loan modification program has $75 billion with which to work to rescue troubled loans. This program had a rough beginning. In the first quarter of 2008, 53 percent of the modified loans went bad again within six months, according to the U.S. News & World Report website. Function In order for a loan modification to work, the Obama Administration concluded that borrowers should not pay more than 31 percent of their gross monthly income to a mortgage payment. Loan servicers that participate in this program will reduce the borrower's payments to no more than 38 percent of gross monthly income, and the government will chip in the rest to lower the payment to 31 percent. Features In order to bring the monthly payment down, the lender reduces the interest rate to as low as 2 percent. If that still doesn't bring the monthly payments down enough, the term of the loan will be extended to 40 years. If that still doesn't bring the payments down enough, the lender will forego all interest paid on the loan. Loan modification does not require lenders to reduce the principal, which some people see as a shortcoming of this plan, because the people who owe more on their house than what it is worth are the ones who have an incentive to default on the loan. Lenders and borrowers will receive cash incentives for successful participation in the program. Identification Not everyone qualifies for a loan modification program, only owner-occupied residences do. People who purchased homes as an investment property need not apply. Because this program is for people who are suffering "serious hardships," applicants need to prove this by providing a signed affidavit of financial hardship with documents that verify this. Mortgage balances of more than $729,750 are not eligible for this program, and neither are mortgages taken out after January 1, 2009. Theories/Speculation The objectives for the loan modification program are to keep borrowers in their homes and to provide immediate payment relief and get mortgages stabilized. The modification costs must be less than the probable cost of foreclosure, according to the Federal Deposit Insurance Corporation (FDIC). Call your lender and ask the loan mitigation department to see if you would qualify. The goal for this program is to help 3 to 4 million homeowners.