Since the housing crisis began, more than $1 trillion in equity has been lost nationwide. This means that millions of homeowners are now under water on their mortgage, meaning they owe far more on their home loans than the current value of their property. This is a big problem as it means borrowers cannot qualify for refinance to lower their interest rate and may not be able to sell their home either. Federal authorities have launched an updated loan modification program designed to address this issue with a capital reduction alternative option.
A loan modification program with low interest rates, longer loan terms and now capital reduction is part of the Treasury Department’s HAMP offering. This is funded by $75 billion in stimulus funds, and to date only about $3 billion has been used — a lot of help available for homeowners who are struggling financially and are at risk of losing their homes. There’s a catch, however: Borrowers must demonstrate that they meet federal requirements to qualify before any type of loan modification program is offered.
HAMP stands for Home Affordable Modification Plan, and this program provides standardized home loan modification methods for those borrowers who can meet the minimum eligibility requirements. Interested borrowers will be asked to submit an application package and based on what is submitted, a decision will be made as to whether program options are available. PRA stands for Principal Reduction Alternative and is part of the HAMP options that may be offered to eligible homeowners.
The basic advantages of this loan modification program are:
- Lower the interest rate down to 2%
- If necessary, extend the loan term to 40 years
- Forgive home balance for underwater homeowners
- Achieve a new target payment that’s affordable and equals just 31% of the household’s gross monthly income
Homeowners are encouraged to contact their lenders to apply for HAMP to avoid foreclosure and stay in their home. The approval process is now streamlined – but borrowers need to understand exactly how to prepare their application – and particularly the financial statements. This one part of the application is critical because it really determines whether the homeowner fits within the Fed’s mandated approval guidelines.
The approval formula is a standard mathematical equation used by all lenders participating in HAMP. The good news is that borrowers can use this exact formula to prepare their own financial statements and be confident that they have the best chance of success. Monthly income and monthly expenses need to fit into the debt ratio as well as the asset ratio of your cash on hand. Homeowners should take the time to properly prepare their application for the best chance of approval.