Modifying a mortgage loan has become much easier since the implementation of the Obama administration’s loan modification plan. This plan provides incentives to lenders to change the terms of an existing loan to make payments on Columbus houses more affordable to homeowners. In the past, getting a mortgage modification was far more difficult, since lenders had to bear certain costs of the process.
Do You Qualify?
In order to qualify for Obama’s loan modification program, the home must be your primary residence, and you must have purchased your home before January 1, 2009. The Obama plan does not apply to jumbo loans, which in most cases means your loan amount can’t exceed $729,750; however, the allowable limit may be higher in high-cost housing areas.
Your first mortgage, including principal, interest, taxes, and insurance, must exceed 31% of your gross monthly income, and the program applies only to a first mortgage, not to any second mortgages or home equity lines of credit. Finally, you must be experiencing some type of financial hardship that makes it difficult for your to pay your mortgage. Common causes of financial hardship are job loss, a reduction in hours, illness, and divorce or separation.
Loan Modification Process
The first step in the process is to contact your lender. Under the Obama plan, a lender is not required to modify your loan, but participating lenders are more likely to work with you because of the financial incentives the plan offers.
Next, you’ll need to gather relevant documents. This includes evidence of your pre-tax monthly household income, your most recently filed tax return, information on savings and assets if applicable, and mortgage and loan statements for your first and second mortgages or home equity line of credit. You’ll also need to create a detailed budget that lists your monthly expenses, including credit card payments and installments loans, like student and car loans.
Once you’ve gathered this information, you will go through the final process with your lender of negotiating the terms and completing the necessary paperwork.
Modification vs. Refinancing
So why bother to modify your loan instead of pursuing a refinance? The two main reasons are cost, and the ability to qualify. In most cases, you’ll need excellent credit in order to qualify for a refinance in the current credit climate. If you’re in danger of falling behind on your mortgage, chances are you have less than spotless credit. There are also no fees associated with a mortgage modification under the Obama plan, and if you are in arrears, late fees and penalties can be waived. With a refinance, you will be responsible for closing costs and other fees.
Modification is the best option if you are falling behind on your payments, or if you could not afford to stay in your home with a new loan at conventional rates. On the other hand, refinancing is a better option if you have equity in your home and are looking for a better interest rate, even if you don’t qualify for a loan modification plan. Refinancing is also the only way to cash out if you want to tap into your home’s equity.
Doing your own loan modification is a simple process, and there is no need to pay the typical fees of $800 to $2,000 to hire a lawyer or service provider to negotiate the modification on your behalf. The Obama plan provides enough incentive to lenders that you can negotiate your own loan modification, provided you are well prepared and can make a good case that you’ll be able to pay your modified monthly payment.
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