The picture is a little brighter now for people who are having trouble meeting their monthly mortgage payments. It used to be the case that when a person got behind with their payments, they were almost sure to face foreclosure in the immediate future. At that time, lenders lacked a consistent set of steps to follow when addressing a loan owner who had fallen behind. To “fix” the problem, they usually kept the monthly payments as they were and just added the missed payments onto the loan principal. This was good in theory, but struggling homeowners still couldn’t keep up with the monthly payments and fell hopelessly behind. But now the Obama administration has set up a consistent set of loan modification guidelines in the case of troubled homeowners through the U.S. Treasury.
The President’s new Making Home Affordable plan aims to alter the monthly payments of a loan, making them lower and more affordable for people. They should be equal to or less than 31% of a person’s gross monthly income. When lender indentify a borrower as at risk for foreclosure, they now know exactly what to do. The U.S. Treasury put in place a clear set of steps known as the Standard Waterfall. The Standard Waterfall is as follows:
1) Lenders ask for income verification from borrowers, including tax returns, pay stubs, and letters from employers.
2) Lenders figure out a borrower’s monthly payment, including all applicable fees, taxes, and insurance – but not late payment fees accrued to that point.
3) Lenders look at the monthly payment as a function of gross monthly income. They will try to get the monthly mortgage payment down to 31% of the gross monthly income, known as the 31% debt-to-income ratio (DTI).
4) Lenders begin to reach the goal DTI by making incremental interest rate reductions of 0.125%. They continue to do this until a floor interest rate of 2% is reached.
For every loan modification they do, lenders get an incentive check for $1,000 from the government. They are supposed to follow the Standard Waterfall steps above, perform a cost analysis, and decide if the incentive payments will give them a better outcome than foreclosure would. If they decide in the affirmative, then they will proceed with the modification. After making payments on the modified loan for a three-month period, the new interest rate will stay fixed for the next five years.
We have supplied at the bottom of the page an application to start the process of getting a loan modification. The earlier you get started, the faster getting your loan modified will get done.