In the wake of the 2008 financial crisis, the government announced programs to help homeowners at risk of losing their homes.
Policymakers extended those mortgage modification programs more than once. Now they are finally being replaced with new programs.
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One of those programs is the Home Affordable Modification Program (HAMP), which expired at the end of 2016. But if you have a Freddie Mac or Fannie Mae mortgage, you might be able to take advantage of a new option called Flex Modification.
Fannie and Freddie will begin requiring the Flex Modification in October 2017, but it is possible to apply for the program on a case-by-case basis starting from March 1, 2017.
What is mortgage modification?
Any loan modification program focuses on adjusting the terms of the loan to make it more affordable. A mortgage modification can be permanent or temporary, depending on the terms of the program.
Nadia Kourehdar, managing attorney at Ark Law Group, points out that there is a difference between a refinance and mortgage modification.
“A refinance typically applies to people who are current on their mortgage and looking to restructure their loan,” she says. “A mortgage modification typically applies to people who are in default and looking to execute a new agreement with their bank that will allow them to resume making mortgage payments.”
Having a mortgage modification might involve a reduction in your mortgage payment, a longer repayment term, or a decreased interest rate. The original loan remains in place, but it’s adjusted to make it more affordable.
Many of the changes, such as changing the loan to a fixed rate or extending the term to 40 years, are permanent. However, a lower interest rate might only be temporary. Find out whether the changes are permanent or temporary before agreeing to the mortgage modification.
What is the Flex Modification program?
The new Flex Modification program preserves some parts of HAMP. Homeowners facing financial hardship can change their mortgages. This allows them to make smaller payments and keep their homes.
Those most likely to benefit, says Kourehdar, are those who are newly in default or who are at risk of imminent default. “The program is designed to provide relief for people who reach out quickly once they can’t afford their mortgage payments,” she explains.
Not only that, but it’s possible for homeowners to apply for a Flex Modification before you miss a payment. You need to show you have an upcoming hardship, though. This hardship can be job loss or a change in financial circumstances due to divorce or high medical bills.
This new mortgage modification will become the norm on Oct. 1, 2017. It will completely replace the Fannie Mae Standard and Streamlined Modification programs. Even though Fannie and Freddie still have the old programs in place, it’s possible to submit cases for help under the new plan.
How to apply for flex modification
If you have a Freddie Mac or Fannie Mae mortgage, you might be eligible for Flex Modification. You need to go through your servicer to apply for a mortgage modification and must have a Freddie Mac or Fannie Mae mortgage to qualify.
Ark Law Group points out that either Fannie or Freddie owns close to 75 percent of residential mortgages in America. Even if there’s a different name (such as Wells Fargo) on the letterhead, there’s a good chance Fannie or Freddie own the loan.
To be eligible, you need to have documentation of your hardship and meet the following requirements:
- The modification should be on your primary mortgage
- Can be on the home you live in now, a second home, or an investment property
- You must be at risk of imminent default or your home must be at least 60 days delinquent if it’s your primary residence
- If you want a Flex Modification on a second home or investment property, it must be at least 60 days delinquent.
- Your loan had to originate at least 12 months ahead of your application
Contact your loan servicer for more information. You can find out who owns your loan using the tools offered by Fannie Mae and Freddie Mac. Both have slightly different versions of the Flex Modification, however.
Fannie Mae mortgage modification payment targets
Fannie Mae allows a principal forbearance, bringing the home up to an 80 percent mark-to-market loan-to-value ratio. This is a measure of how much you own on your home in relation to its current fair market value. However, Fannie Mae doesn’t allow for the forbearance to exceed 30 percent of your unpaid principal balance.
If a homeowner is less than 90 days delinquent, they need an additional loss mitigation application. The program targets the home expenses at no more than 40 percent of income while trying to reduce payments by 20 percent.
When you have a delinquency of greater than 90 days, the extra application isn’t needed. The target is a straight 20 percent payment reduction.
Freddie Mac mortgage modification payment targets
Freddie Mac’s Flex Modification comes with slightly different program parameters. Rather than 80 percent forbearance, Freddie offers up to 100 percent MTMLTV ratio. However, the amount still cannot exceed 30 percent of the unpaid principal balance.
Homeowners that are less than 90 days delinquent need the modification to result in a payment that doesn’t exceed 40 percent of their monthly income.
What happens if you still can’t pay?
Sometimes, no matter how hard you try, things come up. If you get a home loan modification and find you can’t pay the new terms, you still have options.
“Some homeowners decide to move on from the home using different loss mitigation options,” says Kourehdar. “Some pursue short sales, deeds in lieu programs, and cash for keys programs. Other homeowners find that applying again for a modification may be in their best interest.”
However, some lenders and servicers won’t allow you to modify an already modified mortgage. It’s important to find out the terms of your mortgage modification before moving forward. “Some homeowners simply stay as long as they can without paying and let the home go to foreclosure,” says Kourehdar.
“Some homeowners simply stay as long as they can without paying and let the home go to foreclosure,” says Kourehdar.
Worried about keeping up? Consider Flex Modification
Since it’s possible to submit for a loan modification using the new Flex rules, that might be the way to go. If you’re worried that you can’t keep up with your current payments, but think you could do fine with a Flex Modification, this might be the solution for you.
If you’re still in the market for a mortgage, check out these 7 tips to help you find the right mortgage company.