The U.S economy is in the midst of a recession which is increasing the number of jobless claims and homeless rates.
As a result people are falling behind on their mortgage payments which can result in home foreclosure. Families who are not able to pay their debts are on the brink of losing their homes. To overcome this problem, President Barack Obama has developed with loan modification program.
The focus of loan modification is to lower the homeowner’s mortgage payment. With this in mind, the Obama’s administration has designed a loan modification plan, which allows homeowners the opportunity to reduce or eliminate excessive charges that are being tacked on to their mortgages.
How it works?
1. Reduce the interest rate:
The loans that will undergo modification will be at a significantly reduced interest rate. The modified interest rates can fall between 1-6% depending on the customers hardship and their ability to prove financial difficulty as a result of their mortgage.
3. Reduction of principal balance:
The Obama plan implies that the principal reduction amount will not inflate the interest charges. If the option of principal reduction is used, the remaining capitalized balance will be carried forward until the loan that is modified matures and the underlying property is sold or the loan is refinanced.
3. Reduced monthly payments.
Homeowners wishing to reduce their monthly payment should contact their lender directly.
The loan modification plan requires the lender to reduce the mortgage payments to no more than 31% of the borrower’s debt to income (DTI) ratio.
4. Lenders incentive to modify:
Participating lenders will receive $1000 in incentives from the government to qualify homeowners for the loan modification plan.
To assist the homeowner in reducing their principal, the loan modification plan will provide an incentive to qualified homeowners for the next 5 years.
5. Homeowners and successful loan modification:
A homeowner can benefit from the loan modification plan by successfully meeting the requirements of paying the installments on time. This automatically lowers the principal amount of the loan that the person has borrowed. This is an added benefit of this loan modification plan.
It is necessary for a borrower to retain all the documents to prove that the loan modification plan was approved. This will allow the homeowner to keep a record of all the current happenings in the loan modification program.
The Loan Modification plan has been warmly accepted by homeowners and has enabled thousands of people reduce their mortgages. However, lenders are extremely reluctant to modify loans, and only a very small number of loans have been modified.