How the Home Affordable Modification Program works

Hand signing mortgage next to house

The first thing families in danger of losing their homes should do is try to get their loans modified so they can afford to make the payments.

And the first step to getting a loan modification is to apply to the federal government's Making Home Affordable loan modification program.

Even though more modifications are being made outside the government's loan modification program than through it, you must first apply through the government program before you will be considered for any other help.

Modification changes the terms of your existing mortgage -- without refinancing the loan -- to lower the monthly payments.

To qualify for a mortgage modification, you must show that your income or expenses have changed significantly -- maybe your mortgage rate adjusted, you lost your job or you are paying unexpected medical bills.

Your monthly payment, including interest, principal, homeowners insurance, property taxes and homeowners association fees, must be more than 31% of your income before taxes.

You also must live in the home. The modification program does not apply to vacation or investment properties, although it can apply to property with up to four units if you live in one of the units.

The balance you owe cannot be more than $729,750 on a single-family home. For a duplex, the limit is $934,200; for three units, it is $1,129,250, and for property with four units, it is $1,403,400.

The mortgage must have been taken out on or before Jan. 1, 2009.

You can be behind on your payments, but you don't have to be.

Here's how the process works:

Call the bank or mortgage company you send your mortgage payment to every month. If it is participating in the Home Affordable Mortgage Program (HAMP), it must screen you for eligibility.

That screening involves looking at your case to determine what is in the best interests of the loan investors -- modifying your loan through the government program, modifying it outside the government program or foreclosing on your house.

You must provide documentation of your income, including two recent pay stubs. You also must allow the bank to get copies of your income tax returns directly from the Internal Revenue Service.

Don't be surprised when you are asked to submit massive amounts of paperwork -- over and over again. This process is not for the faint-hearted. Just keep trying.

"Call them every couple of weeks and say, 'Do you have everything you need to approve my request for a modification?' " says David Bartels, president of US Home Loan Advocates Inc. "Say, 'Has it been assigned to a negotiator?' "

Keep calling, and give them whatever they ask for, no matter how many times they ask for it. "It's their rules," says Bartels.

The goal of the mortgage modification program is to lower borrowers' mortgage payments to no more than 31% of their gross income, a common measure of affordability.

Lenders do this by lowering interest rates to as little as 2% for at least five years. They will lower the rate only as much as necessary to get your total mortgage payment down to 31% of your income.

If they lower the rate to 2% and your payments are still unaffordable, they can extend the length of the loan for up to 40 years.

After that, they may allow you to pay some of the principal at the end of the loan or when you sell the house, whichever comes first.

If you owe considerably more on your house than it is worth, lenders might forgive some of the principal you owe. In fact, after program enhancements are put in place, lenders are required to consider reducing your balance if you owe more than 115% of what your home is worth.

Once the details of a loan modification are worked out, you're put on a trial modification for three months. If you're current at the end of three months, you are considered for a permanent modification.

That's not automatic, however. Many borrowers tell about being approved for trial modifications, never missing a payment and then not getting a permanent modification based on the same information they supplied to get the trial modification.

If you're lucky and your permanent modification through HAMP is approved, your new interest rate will last at least five years. At that point, it can begin to rise but by no more than one percentage point per year. It will be capped at the prevailing rate at the time of the modification.

At the end of five years, homeowners who stay current on their payments will have $5,000 knocked off their debt, paid for by the federal government.

What motivates lenders to let you modify your loan?

Therein lies the problem. They will do whatever makes the most money -- or loses the least money.

"Banks make more money in foreclosures than in modifications," Bartels says.

The Obama administration hoped that cash incentives paid to lenders would tilt the calculation in favor of modifying, rather than foreclosing, for many homeowners.

But despite increases in the amount reimbursed to the lenders, the results are disappointing.

"When the program was introduced in 2009, the goal was to help 9 million distressed homeowners in two years. Eighteen months later, only 376,000 have gotten permanent loan modifications," says Bartels.

If you're turned down for the government program, you can still apply for an in-house loan modification from the bank. Many people who don't meet every requirement for the government programs are getting help directly from their banks.

Mortgage modification programs can't help everyone. They work best if you're in some -- but not too much -- financial distress.

If you are unemployed, for example, virtually no lender will modify your loan -- at least not on a permanent basis.

But new enhancements to the HAMP program may allow you to get your mortgage payments temporarily reduced for three to six months while you look for work.

Once you find a job, you can then apply for a permanent modification based on your new income.

If a mortgage modification or temporary assistance for the unemployed can't keep you in your house, a program called Home Affordable Foreclosure Alternatives may at least help get you out of your house gracefully.

Foreclosure Alternatives encourages banks to avoid foreclosure by accepting short sales (in which the bank agrees to take whatever you can get for the house, even if it's less than what you owe on your mortgage) and deeds-in-lieu of foreclosure (in which the bank essentially takes the keys to the house and calls it a day).

Why try to avoid foreclosure if you're going to lose your home anyway?

Using the Home Affordable program to negotiate a short sale or deed-in-lieu of foreclosure:

If you have a lot of debt in addition to your mortgage, you may have to agree to mandatory counseling to help you deal with your debt.

This applies to those who have total monthly debt payments of 55% or more of their gross monthly income after the loan modification. That includes your modified mortgage payment, plus things like home equity loans, car loans or lease payments, credit card debt and alimony.

If you have further questions, go to the government's Web site, MakingHomeAffordable.gov.