Mortgage Modification Steps
As we already know, the Obama administration’s mortgage plan encourages lenders to modify the mortgages of homeowners who can’t afford their monthly payments and are at risk of default. Those homeowners, who qualify, would keep their current loans, but the payments would be reduced to 31 percent of before-tax income. The guidelines for the mortgage modification plan make 17 pages and outline, which homeowners are eligible for modifications and how those monthly house payments are reduced to 31 percent of income.
Under this plan, the house payment includes principal, interest, taxes, homeowners insurance, and homeowners association or condo fees, and excludes mortgage insurance premiums. First off, the lender drops the interest rate as low as 2 percent. This stage may be sufficient to bring the payment down to 31 percent of income. If not, then the second step would be extending the term of the loan up to 40 years.
If a 2 percent rate and a 40-year term don’t bring the payment down enough, the third measure is to “forbear principal.” This means that the borrower owes the same amount as before, but pays interest only on part of the mortgage balance.