Current mortgage crises have shaken the entire financial system from its foundation. With the free market defying all laws of market dynamics and the system is swinging wildly between the extremes. Obama government had to intervene before this crisis devoured the whole system. So in February 2009 Obama government proposed home loan modification plan in the stimulus package to bail out the 9 million homeowners caught in the crisis of failure to pay off their home loan mortgage.
Before knowing if you qualify for Obama’s home loan modification plan or not, let’s try to understand what is Obama’s home loan modification plan?
The program can be divided into two parts:
Part I: Homeowners who are facing foreclosures due to delinquency in their mortgage payment and may default on paying the home loan the government will give the banks financial incentives to “modify” or alter the existing mortgage by either resetting the interest rate, payment deferment for a particular period of time or readjustment of principal amount.
Part II: Under this program the homeowners who are paying the mortgage payment but cannot refinance because their home equity has come down, government will provide incentive to the lenders to help the homeowners refinance so that they can pay lower monthly payments.
Both the programs have their own set of caveats for homeowners to qualify. The plan is in effect till 2012 and can be availed only once.
To qualify under Obama’s home loan modification plan, besides having an income enough to cover the modified mortgage payment after covering your household expenses, homeowners must meet following criterion:
- You must have secured your loan before Jan1, 2009.
- Your primary mortgage should be less than $729,500
- You must be living on that property. The plan is not for home owners who have purchased the property only for investment purposes and are not living on it.
- Your income along with the tax returns and pay stubs should be fully documented in the application submitted to the lender. However each lender might have their specific requirements that you must adhere to.
- You must furnish a financial hardship document to the lender before your secure a loan modification
- Must attend HUD certified counseling if your total household debt exceeds the income by 55%
If as a homeowner you meet all the above qualification then the lender would assess based on your application, your reduced monthly payment could be about 31% of your gross monthly income and the interest rate could be as low as 2%.
The home loan modification scheme is free of cost for the homeowners however if the lender has reduced the monthly principal payment as a result of modification, the homeowners might have to pay a big lump sum even after they have paid off the loan, sold the property or refinanced.
The financial incentive to the lender is that for every month that a homeowner makes timely payment, treasury will pay an incentive to reduce the principal balance on the loan. With no trial period for this loan modification scheme, say homeowner pays the mortgage on time, the lender get $1000 each year from treasury so over a five year period this could add up to $5000 per loan modification scheme for the bank.