The loan modification process involves a standard method of modifying loans into new affordable monthly payment terms. This is called the Waterfall Method and it is mandated for use under the Treasury Department’s loan workout plan. This plan is called HAMP – for Home Affordable Modification Program. When your lender reviews your application, part of the process will be to determine if your loan and financial circumstances will fit within this method of modification.
The loan modification process begins with a borrower contacting their lender and requesting consideration for HAMP. It is important to specifically ask for this plan because lenders are required to review each and every homeowner who asks for help under this plan. While your file is being reviewed for eligibility, the lender is not allowed to move your home forward to foreclosure sale. So this gives you some time and a second chance to save your home with a loan workout.
Once you complete your loan modification application and send it in along with your income documentation, your entire package will be reviewed for eligibility and acceptability. Here is the basic loan modification process:
- Homeowners request consideration for HAMP
- Borrower completes the application package and provides proof of income
- Lender reviews the information provided by homeowner for eligibility
- Waterfall Method of Modification is attempted and acceptability is determined
- If the loan can be modified using the standard terms, then the homeowner may be approved for a loan modification
- Homeowner enters 3 month trial modification period, after which mod is made permanent
How exactly does the Waterfall Method of modification work? This standard formula uses several criteria to determine which loans and borrowers will be eligible. Remember that the homeowner is providing their financial information – monthly income, monthly expenses, cash in the bank, etc. – on their application form and this is the information that is used when determining if the homeowner will qualify. The lender will use standard methods of reducing the current mortgage in order to meet a new target mortgage payment. This new payment will equal 31% of the borrowers reported gross monthly income and it includes principal, interest, taxes, insurance and any HOA dues.
The first Waterfall method step to reach the target payment is to reduce the interest rate, and the rate can go down as low as 2%. If more changes are needed to reach the goal, then the loan term may be extended to 40 years. The final step is to forgive or defer some principal balance to reach the new desired target payment. This is called a Waterfall Method because they lender must follow these steps in order, as they are needed. However, if the borrowers income is too low or too high, or if the loan balance is so high that a large principal reduction would be needed, the loan modification may be denied.
Homeowners who hope to be approved need to understand how the loan modification process works and most importantly how they should complete their financial statement so that it will be acceptable. If you know ahead of time how much income you need to prove to qualify, then you will be able to make the necessary adjustments and submit an acceptable application. If you knew that just by cutting a couple of hundred dollars a month in expenses, you would fit the guidelines, then you would certainly do that, right? This is confusing for borrowers, but you can use a loan mod software program that will actually show you just how much income you need and where you may need to fine tune your figures to fit into the standard HAMP guidelines.