Loan Modification Guide for Homeowners

Loan modification is a hot topic and getting a lot of "hype" in the news. Below we have detailed what a loan modification means and who qualifies for the Home Affordable Modification Program which was recently launched by the Obama administration.

What is Loan Modification?

Loan modification programs are typically designed for homeowners who are having difficulty making their mortgage payment, but who can't qualify to refinance their mortgage. A loan modification is different than a refinanced mortgage which trades in one mortgage for another one. It also differs dramatically from foreclosure, a short sale, or a deed in lieu.

A loan modification usually involves reducing the underlying interest rate and in many cases it means converting the mortgage from from an adjustable rate mortgage (ARM) to a fixed rate mortgage. Other modifications can also include extending the term of the loan (for example from 30 to 40 years) and/or adding missed payments to the loan balance. The bottom line is that a loan modification is intended to reduce the payments for the borrower, make it more affordable, and reduce the risk that the homeowner will default on the loan.

Obama Loan Modification Plan

President Obama recently announced a $75 billion initiative called the Homeowner Affordability and Stability Plan (HASP). One of the principal tenants of the plan is called the Making Home Affordable initiative and it is comprised of two parts.

The part of the plan that is focused on loan modification is called The Home Affordable Modification program and is designed to reduce monthly mortgage payments for people who are close to foreclosure by modifying their mortgages and lowering their monthly payments on their loans.

Requirements for The Home Affordable Modification Program

  • Mortgage balance must be no greater than $729,750.
  • Home cannot be vacant or condemned and must be a primary residence—not investor owned.
  • Have a loan that was originated on or before January 1, 2009
  • Have a mortgage payment (including taxes, insurance, and home owners association dues) that is more than 31% of your gross (pre-tax) monthly income
  • Have a mortgage payment that is not affordable, perhaps because of a significant change in income or expenses.

To find out if you are eligible, there is a simple online form at the website. Check it out here:

How does it all work?

Once it is determined that you qualify, service providers will be required to follow a sequence of steps that modify the loan in order to reduce the monthly loan payment to no more than 31% of gross monthly income. For example, the interest rate can be lowered to as low as 2 per cent and the term of the mortgage can be extended to a maximum of 40 years in order to maximize the reduction in loan payment.

Starting the process and required documentation

After you have determined that you are eligible, all you need to do to get the process going is call your loan servicer (the company you pay your mortgage to) and ask to be considered for a Home Affordable Modification. You should be able to find their phone number on your latest bill.

Below is a list of the documentation you will probably be required to provide to your loan servicer. To speed the processing of your application, you should probably get this together before calling them.

  • Most recent income tax return.
  • Information about assets.
  • Information about any second mortgage on the house.
  • Account balances and minimum monthly payments due on all credit cards.
  • Account balances and monthly payments on all other debts such as student loans and car loans.
  • A letter describing why your mortgage is unaffordable (i.e. what caused your income(s) to be reduced or expenses to be increased).

Beware of Loan Modification Scams

There should never be a fee for assistance with or information about the Making Home Affordable Program. If you would like credit counseling before applying for the loan modification program, HUD-approved housing counselors can help you evaluate your income and expenses and understand your options. This service is Free as well! You can find them here: or you can call them at 1-888-995-HOPE (4673).

  • Beware of any person or organization that asks you to pay an upfront fee in exchange for a counseling service or modification of a delinquent loan. Do not pay – walk away!
  • Beware of anyone who says they can “save” your home if you sign or transfer over the deed to your house. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
  • Never make your mortgage payments to anyone other than your mortgage company without their approval.

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