UTAH REAL ESTATE INVESTOR

I have talked to many people who do not understand how the “Making Home Affordable” loan modification payments are calculated.  The 2 biggest mistakes I have heard are:

1. The loan modification will be 31% of your gross income or,
2. The loan will be modified to a 2% interest rate.

Unfortunately neither option is correct.  The Home Affordability Modification Program (HAMP) Standard Modificatin Waterfall (loan modification calculation) follows the following steps to calculate a modified payment for a borrower:

1. The borrower’s interest rate on converted to a fixed interest rate on a fully amortizing loan.  If the Adjustable Rate Loan (ARM) is set to adjust within 120 days then the rate will be calculated at the higher interest rate.
2. The accrued interest, escrow advances, and servicing fees are capitalized into the principal balance owed.  Note: Late fees may not be capitalized and must be waived if the borrower qualifies for a permanent modification.
3. The interest rate is reduced in increments of .125% to reach a payment equal to 31% of the borrower’s gross income.  The interest rate cannot go below 2%.
4. If the target mortgage payment has not been reached then the loan may be ammortized up to 40 years (480 months) from the date of the permanent modification.  No negative ammortization is allowed.
5. If the target mortgage payment has not been reached then a principal forbearance (no interest, no payments) must be created so that any principal over 100% LTV is not included in the modification payment.
6. This is no requirement for lenders to forgive any principal under the HAMP modification.  If the target mortgage payment cannot be achieved through the previous 5 steps then the borrower does not meet the income qualifications for the loan modification under the HAMP and will have to pursue other workout options.

Example 1:

Let’s pretend that John Borrower bought a $300,000 home 2 years ago.  He paid $25,000 down payment and got a$275,000 ARM loan at 7% interest and a PITI payment of $1,830/mo (assuming $125 for taxes and insurance).  His loan is going to adjust to 7.25% in 90 days and his payment will increase to $2,005/mo.  John’s employment income has been reduced to $2,355/mo gross income and his property value has fallen to $200,000.  Due to the reduced income John is now behind 3 months.  Here is how John’s modification would work out…

John’s target mortgage rate is 31% of his gross monthly income.  With $2,400/mo gross monthly income his target payment is $744/mo.

1. John’s interest rate is converted to a fixed rate, fully ammortizing loan.  Because his rate will adjust in less than 120 days the higher rate is used for the conversion (7.25%).  John’s loan payment would become $2,005/mo.
2. John’s 3 late payments ($5,490 would be capitalized into his loan) for a new balance of $280,490.  The resulting payment would now be $2,038/mo.
3. The interest rate in now adjusted down in  .125% increments from his converted interest rate until the modified payment reaches the target monthly payment or 2%.  In John’s case the interest rate reaches 2% resulting in a payment of $1,162/mo ($280,490 principal, 2% interst, 30 year fixed rate mortgage, $125 taxes and insurance).
4. Since the target mortgage payment has not been reached the length of the loan is extended to 40 years resulting in a payment of $974/mo ($280,490 principal, 2% interest, 40 year fixed rate mortgage, $125 taxes and insurance).
5. The target payment has not been reached so the lender must give a principal forbearance.  In this case the market value of the property is $200,000.  The lender will have to give a forebearance in an amount up to $80,490 (the final Loan To Value on the interest bearing principal must be 100% or more).  The modified payment now becomes $744/mo ($204,408 interest bearing principal, 2% interest, 40 year fixed rate loan, $125 taxes and insurance).
6. Because we reached the target payment amount John would qualify for the loan modification under this program with a modified payment of $744/mo.  If John made less than $2,360/mo gross income (target payment of $730/mo) then he would not qualify for the loan modification based on income.

Example 2:

Let’s pretend that John Borrower income is actually $4,000/mo gross monthly income.  This creates a new target payment of $1,240 (31% of $4,000).  John’s modified mortgage payment is calculated as above (as follows)…

1. John’s rate is converted to a fixed 7.25%, fully amortized loan.
2. The mortgage is capitalized to $280,490.
3. The interest is reduced in .125% increments to as close to $1,240 without going under.  The resulting interest rate would be 2.625% and the resulting payment would be $1,252/mo ($280,490 princpal, 2.625% interest, 30 year fixed rate, $125 taxes and insurance).
4. At this point John would be qualified for a modified payment under the HAMP program with a payment of $1,252/mo. 

Keep in mind that there are other factors required to qualify for the loan modification.  This information is designed to give a consumer a general idea of how the modification payments are calculated.

Remember, loan modification help is FREE. Beware of scams! For more information on the Making Home Affordable loan modification program check out their website at http://makinghomeaffordable.gov.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org. To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).