Mortgage loan modification

First, here are some things you should know.
1. Who is eligible for loan modifications

Mortgage holders can qualify for one of two programs:

* Mortgage holders who are behind on their payments can apply for the “loan modification” program.
* Mortgage holders who have not missed payments but whose payments are more than 31 percent of their monthly income can apply for the “refinance” program. It is only available to people whose mortgages are held by Fannie Mae or Freddie Mac.

The government’s $75 billion foreclosure prevention plan is open for business. Homeowners struggling with mortgage payments can now take advantage of the new loan modifications programs.
2. How much will payments be lowered

Under the new plans, homeowners’ mortgage payments must be lowered to no more than 31 percent of their monthly income. Loan servicers must lower the interest rate on the loan to meet this requirement.

The interest rate cannot be less than 2 percent on the mortgage loan. If the payment can’t be lowered enough through the interest rate, terms can be extended up to 40 years.

The new interest rate on your loan will stay locked in place for five years. After that, the interest rate will go up 1 percent per year. It will continue to go up until it is back to the original interest rate or until it hits the prevailing interest rate that was available at the time your loan was modified, whichever is lower.
3. How the government helps modify the loans

Under the loan modification program, loan servicers are only required to reduce the total amount of your mortgage payment to 38 percent of your monthly income. The government will subsidize loans so homeowners only pay 31 percent of their monthly income.

In addition, the government will provide incentives to banks to encourage them to take part in the loan modification program.
4. You must prove hardship

Administration officials are stressing this program will not be used to bail out irresponsible home buyers. They specified that people who bought investment properties, lied on their mortgage documents or purchased multimillion dollar homes will not qualify.

Federal officials have said only “at risk” homeowners can get government assistance. Applicants must prove one of these:

* serious hardship
* declines in income
* increase in expenses
* facing an interest rate hike
* high mortgage debt compared to income
* they owe more than their house is worth
* reasons for being close to default

5. Exclusions to the loan modification program

Only loans that were issued before Jan. 1 of this year are eligible for modification. Loans on properties worth more than $729,750 are not eligible.