Incentives and Terms of Obama's Home Loan Modification

Homeowners all across America are in hot water these days. Falling property prices combined with widespread layoffs and unemployment are making more and more people unable to make their monthly mortgage payments. Obama's home loan modification plan, which went into effect on March 4th, 2009, targets homeowners at risk for foreclosure and attempts to avoid it.

The President’s new program is different than previous attempts by lenders to deal with borrowers that were having trouble making payments. The Making Home Affordable plan sets a clear and consistent step-by-step approach to modifying home loans and effectively reducing monthly payments. This enables successful payments of the loan and potentially can prevent million of foreclosures nationwide.

When a person is identified as at-risk for foreclosure, they must first be considered for a Hope for Homeowners refinance. If that is determined not to be the best option for them, then a loan modification is in order.

Under the loan modification plan, a homeowner’s gross monthly income must be calculated and verified. This can be done by providing last year’s tax information, two recent pay stubs, or a letter of verification of income from an employer. The lender is then mandated to bring the borrower’s monthly payment down to 38% of his or her gross monthly income. This is to be done using a series of sequential steps.

First, the lender must reduce interest rates by increments of 0.125% until either an interest rate of 2% has been reached. If the new payments still do not meet the 38% of gross monthly income requirement, then the life of the loan may be extended up to 40 years from the time of modification. If the goal of 38% still has not been reached, then the lender can begin to forbear principal on the loan. (There is no requirement for lenders to forbear principal, although they can do so in order to meet the goal monthly payments of 38%.)

For identifying at-risk borrowers and helping them to modify their loans and avoid foreclosure, participating lenders will receive an initial up-front incentive of $1,000 per borrower. They will also receive an extra $1,000 a year for up to three years for those who are successful in making timely payments. Homeowners who use Obama's home loan modification will also get incentives of $1,000 per year for up to five years for staying current on their new modified loan payments every month.

For additional information about Home Loan Modifications.