Many people fail to pay home loan on time, so they end-up with foreclosures and consequently go into the list of defaulters. It can be really devastating for them as they are deprived of their dwelling and it’s hard to find another place instantly. For all such distressed persons who fear to be unable to pay their home loans on time, there is a good option that’s called loan modification.
What is loan modification?
It’s basically a modified payment plan for the loan , that the borrower has been unable to repay on long-term basis. It:
- reduces interest rate on the loan
- extends the term of the loan
- offers a different type of loan
The plan may involve any one of the above option of three of them in combination. Lenders are mostly happy to modify the plan since it’s better to take less than get no money at all. Going default causes a great loss to them, so they bring some desirable changes in the loan plan, making it easier for the borrower to pay money on time. A loan modification agreement differs from forbearance agreement. The later gives a relief, only short-term for those borrowers with temporary financial disturbances.
Who is eligible for home affordable modification program?
There is a defined eligibility criteria in the program introduced by U.S president Barack Obama. These are stated below:
- It’s required to have the origination date of the loan January 1, 2009 or before that.
- The program does not apply to new borrowers after December 31, 2012.
- The property must be owned as a primary dwelling of one to four units by the borrower. It must not be temporary or on rental basis.
- The principal balance must be less than $729,750 for the loan on a home that is single-unit.
- All borrowers have to show that there is a sever lack of funds or total unavailability to repay without a modification program. The other plan is with high interest rate and a tight deadline.
- Any house owner (borrower) should not owe more than 125% of the actual value of the home he has got.
- The loan has to be a Freddie Mac or a Fannie Mae loan.
In Freddie Mac program, U.S government permits to borrow money at lower interest rate than those offered by other financial institutions. Owing to its low interest rate, it gives huge amount of debt that’s known as agency debt. Then in turn, it makes purchase of large portfolio of mortgage and holds it that is called retained portfolio. This plan has been criticized by many experts as it causes a great risk to the entire country.
Fannie Mae purchases as well as guarantees those mortgages that fulfill its funding criteria. It creates mortgage-backed securities (MBS). Among the investors of Fannie Mae, foreign governments, insurance companies and pension funds are included. The market for this plan is so large. It offers other benefits as well and is more widely accepted than any other loan plan.
