In our previous blog post, we discussed some of the basics of FHA foreclosure avoidance and loan modification. But how does FHA loan modification work?
FHA HAMP, also known as the FHA Home Affordable Modification program is a way for home owners to avoid foreclosure through a permanent loan modification. But in order to become eligible for FHA HAMP, borrowers have to meet certain criteria as described on the FHA/HUD official site. Who is eligible to apply for FHA HAMP?
“Mortgagors with FHA-insured mortgages that do not qualify for other loss mitigation programs and with adequate debt-to-income ratios. Homeowners must successfully complete a trial payment plan before becoming a full participant in the program.”
The trial payment plan is the key to the success of the borrower’s involvement with HAMP. From the FHA official site:
“The trial payment plan shall be for a three month period and the mortgagor must make each scheduled payment on time. The mortgagor’s monthly payment required during the trial payment plan must be the amount of the future modified mortgage payment. The Mortgagee must service the mortgage during the trial period in the same manner as it would service a mortgage in forbearance.”
What happens if the borrower cannot successfully complete that trial payment plan? The FHA official site says, “If the mortgagor does not successfully complete the trial payment plan by making the three payments on time, the mortgagor is no longer eligible for FHA-HAMP” which could lead to foreclosure action.
The trial payment plan isn’t the only thing required to complete an FHA loan modification. The FHA HAMP rules state that only properties without non-FHA liens or those that have non-FHA liens that the lien holder is “willing to subordinate” will qualify for this kind of loan modification. In such cases, “A standard rate and term modification is permitted under the requirements of FHA-HAMP if one or more of the following conditions exist:
-the total outstanding debt can be re-amortized at the market interest rate for 30 years with a resulting principal, interest, taxes, and insurance (PITI) payment at or below the targeted payment;
-the modified loan has a front-end ratio at or below 40% and the total value of existing partial claims is at the Statutory Maximum.
And when does the trial payment plan on an FHA loan modification begin? FHA loan rules state, “Where a Borrower is eligible for an FHA-HAMP option, the Mortgagee must ensure that the Borrower’s (trial payment plan) begins only after 12 months have elapsed since the Closing Date of the FHA-insured Mortgage.”
If you need help to avoid foreclosure, talk to your loan officer as soon as possible-those who act early have many more options open to them than those who delay making arrangements with the lender. Be sure to ask how a loss mitigation program will affect your loan balance overall.