I have discussed in a previous post the eligibility requirements for a loan modification under the HAMP program, now I would like to give you some idea how the mortgage company will determine if you will be offered a modification. We will use the same example that we used in the previous post, you have monthly gross income of $10,000.00 and your mortgage payment is $3,500 per month. Let’s assume that your current interest rate is 5.5% and you have 27 years left on your present mortgage, which has a balance of $400,000. The stated goal of HAMP is to modify your mortgage payment down to 31% of your monthly gross income, which would be $3,100 per month.
The mortgage company will begin its analysis by lower your interest rate incrementally to as low as 2.5% and then re-amortize your mortgage balance over the 27 years left on your mortgage to try to get the payment down to the $3,100 per month figure. If the mortgage company gets down to the 2.5% rate at 27 years and that doesn’t equate to a $3,100 per month payment, the next step would be to extend the term of your present mortgage. So they will take the mortgage balance at 2.5% interest and re-amortize it over a 30 year term and then a 35 year term and then finally a 40 year term to try to get your payment down to $3,100 per month.
If the mortgage company gets to a 40 year term at the 2.5% interest and that still doesn’t get your payment down the $3,100 figure, then only at that point will they consider deferring principal on the mortgage. For example if your mortgage balance is $400,000,they may defer $25,000 of principal and then apply the amortization to $375,000 of principal at the 2.5% for a 40 year term to try to get you to the $3,100 per month payment. The $25,000 deferred principal will remain a lien on the property, however no interest will accrue on it. The monies would only be payable upon your sale or refinance of the property down the road.
Let’s now assume that the mortgage company analysis results in them being able to get your mortgage payment down to $3,100 by amortizing the $400,000 mortgage balance over 30 years at 2.5% interest. The last step in the mortgage companies analysis now becomes the Net Present Value test. This means that the mortgage company will determine if it is better for them to re-amortize your mortgage as stated above and receive their money at 2.5% interest over the next 30 years or is it better for them to continue its foreclosure, incur all the costs and expenses associated with that, and receive the funds from the sale of your residence within the next 2 years or so (or however long they estimate the sale process will take).
The value of your home will have a lot to do with how the Net Present Value test comes out. If you have a lot of equity in your home or even a little equity so that a mortgage company will be made whole through a Sheriff’s Sale, then chances are the Net Present Value test will not work out in your favor and your modification will probably be denied. However, if you have no equity and your house is under water, there is a good chance the Net Present Value test will work out in your favor.
I have obviously over simplified the analysis, however my intent was to give you an idea what the mortgage companies are thinking about when analyzing whether or not to modify your loan.