Financial Talk with Thomas: home loan modification

If you're facing foreclosure, there may a program that can help

With North County in the midst of a foreclosure crisis and much of the country treading water during this dismal economy, I thought it might be empowering to start exploring possible solutions. A few months back, I happened to meet financial counselor Thomas Nitzsche through UMSL’s Neighborhood Leadership Academy, and he has graciously offered to write for NOCO. In his first article here, Thomas discusses the federal government’s “Making Home Affordable” program, which has failed some homeowners but served many others quite well.

The Obama Administration’s home retention program, “Making Home Affordable,” is an important piece of the federal financial stabilization initiative. Some 400,000 American homeowners have benefited from active permanent modifications as of June 2010. They have had a financial hardship and are working hard to keep their home loan current and affordable. But this program is scheduled to expire in June of 2011.

As a North County resident who has benefited from this program (and as a HUD-approved housing counselor), I would like to see our area’s distressed homeowners take advantage of this program while it’s still available.  In addition to a reduced interest rate on the mortgage (lower payments), program participants receive $1,000 towards the principal of the mortgage for each year of successful payments.

Several factors contribute to a homeowner’s eligibility for this program.  Two common misconceptions are that everyone is a candidate for this program and that “the economy” alone is a sufficient reason to give for cause of financial hardship.  Unfortunately, both of these statements are false.   The following steps outline what actions to take when considering home loan modification.

The first step for homeowners to ask themselves is, “What is my financial hardship?”  Common compelling examples include a salary reduction at work, loss of a job, a new job at lower pay, loss of a second job, or the adjustment of a variable-rate mortgage.  The bank requires that the hardship to be both “provable” and “curable.”  Proof of hardship can be W2 or paycheck stubs showing a reduction in income or a mortgage statement showing an increased variable-rate mortgage payment.  “Curable” means that most lenders will not modify a mortgage if the homeowner is unemployed until new employment is secured.   The lender will then base the modification on the new income.

The second step is to visit the official website, makinghomeaffordable.gov, to become familiar with this program.  Screen your mortgage under the eligibility tool, and look up your loan to see if Freddie Mac or Fannie Mae is the investor (see the top left corner, “Loan Lookup”).  These steps will reveal information about your situation that is critical to the modification process.

Another requirement is that you must be spending at least 31% of your household gross monthly income on the 1st mortgage, taxes and insurance.   To determine that percentage, divide your annual gross income by 12 and then multiply by 0.31.   If the resulting number is higher than your current mortgage payment, including monthly taxes and insurance (escrowed or calculated in monthly), your loan may be eligible.  The pre-screening tool on the website will also ask:  Did you get your mortgage before January 1, 2009?  Is the balance on your mortgage less than $729,750?  Is the home your primary residence?  To qualify for the program, the answers to these questions must be “yes.”

If you do not have Internet access, or if you complete step two and think you are eligible, contact your home loan servicer and request an application for the “Making Home Affordable” program.  Ask for it by name because if your loan is current, the servicer will not voluntarily offer it.  The servicer will mail you an application, take your information by phone, or direct you to apply online.  Your personal budget cannot have a large shortage or surplus. You should not have more than $200 left at the end of the month or be more than $200 short after paying your normal housing and living expenses (including other loan payments).

The two most common reasons for an unsuccessful modification are incomplete documentation from the homeowner and missed trial period payments.  Be sure to respond to your lender thoroughly and timely.  Supply all the information exactly as requested, well before the deadline, and follow-up to be sure they receive it.  Make sure trial period payments are made religiously.

Finally, you should never pay any organization to modify your home loan.  No third party can guarantee a promise of loan modification, as a mortgage is a legally binding contract between the lender and the homeowner and any changes are at the lender’s sole discretion.

If you need help dealing with the mortgage company upon their response, or for more information on this process, contact a HUD-approved counseling agency for free counseling by visiting www.hud.gov for a referral to a housing counselor. HUD-approved housing counseling is available locally by appointment at ClearPoint Credit Counseling Solutions’ Florissant branch or by phone.

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Thomas Nitzsche is a National Foundation for Credit Counseling (NFCC)-certified consumer credit counselor, and a Department of Housing and Urban Development (HUD)-approved housing counselor.  He is a NOCO neighbor in Pasadena Park, a graduate of UMSL’s Neighborhood Leadership Academy and the Christian Leadership Training Center and attended Maryville University – St Louis.  He is employed by the non-profit organization, ClearPoint Credit Counseling Solutions (formerly Consumer Credit Counseling Service of St. Louis). ClearPoint was founded more than 30 years ago and has served Florissant for over 14 years.

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