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General Guidelines for Calculating a Mortgage ModificationHAMP, you should realize, is just one methodology for modifying a loan that is seriously “distressed” or, in danger of default if not modified, but there are countless other ways such a loan might be successfully modified. In a HAMP modification, the mortgage servicer multiplies the borrower’s gross income by 31% and then subtracts from that amount monthly property taxes, insurance, and HOA (Homeowner’s Association) dues, if applicable. The result of that calculation is referred to as the “target monthly mortgage payment.” Next, to determine the qualifying interest rate, the servicer adds to the loan balance any back payments that haven’t been made and any interest or escrow advances owed. The servicer then simply lowers the interest rate in 1/8th of one percent increments, which if stated numerically is .125, all the way to the floor of 2%, or until the target monthly payment is reached. If the target monthly payment cannot be reached even with a 2% rate, then the servicer extends the term of the loan up to 480 months, or 40 years. HAMP guidelines
also state that the servicer may consider principal
reduction in order to
reach the target monthly mortgage payment,
and although there are reports that say
that such reductions have been granted in
something like ten percent of cases, it’s
far from clear how these decisions have
been made, and they’re certainly not made
very often. The new Principal Reduction
Alternative to HAMP now calculates that
principal reduction as a final waterfall
test and is programmed into REST 4.0
software. Front-end Debt-to-Income greater than 31% Primary Residence Loan balance less than $729,750 Not necessary to be late on payments Then: Interest rate as low as 2% for five years Term extended to 480 months Principal can be deferred at 0% Principal Reduction waterfall test applied $1000 paid to principal each of five years of successful mo. payments Years 6, 7, 8 - maximum of 1% rate increase (Based on Freddie/Fannie index) Principal Reduction Assistance If the mortgage principal balance on a home exceeds 115% of its market value, PRA HAMP will reduce the principal balance by that difference over a three year period, if the borrower stays current on the mortgage during that time. PRA HAMP will also reduce interest rate, extend term, and include principal forbearance, if necessary, to reduce the monthly payment to 31% of gross income. Standard HAMP modification will do all but reduce principal balance. Conventional Work-out Modification: Demonstrate 'Imminent Default' Negative monthly cash flow Then: Interest rate as low as 2% (Ten year I/O, 30-yr P&I) Term up to 480 months Principal deferred at 0%  Foreclose on Me? - I Don't Think So!  Foreclosure Timer |