Modification for “Government” Mortgages
Loan modifications have been a popular theme on the Mortgage Calculator blog for the last couple weeks, and I plan to continue in that vein with this post. I’ve already covered the process of having a “private” loan modified (one originated/owned by a private lender). Today, I’d like to overview the process for having a “public” loan modified.
First of all, let me explain what I mean by a public loan. I’m primarily referring to loans guaranteed by the Federal Housing Administration (FHA). These loans have historically been available to low-income borrowers, who can apply for a mortgage through the FHA to achieve down-payment assistance and or more affordable mortgages. The second category of “public”mortgages are those held by Fannie Mae and Freddie Mac. These mortgages have always enjoyed an implicit government guarantee. Since the government effectively took control of the mortgage giants, you could say that it has a vested interest in ensuring their solvency, at the very least.
Those that have FHA mortgages are perhaps in the best position when it comes to loan modification. Eligible borrowers typically enjoy a 30% reduction on the interest-accruing balance on their respective mortgages. For as long as they live in the home and stay current on the original mortgage, they are only required to pay interest on the other 70%. When borrowers move out or refinance, however, the entire balance comes due.
Of course, FHA borrowers still have to jump through the same hoops as normal borrowers in order to achieve a modification. In other words, it’s not the FHA that ultimately has the power to approve/deny a modification request, but rather the loan services, which are incentivized by the government to support the program. Still, borrowers who are not yet delinquent on their mortgages probably don’t have a shot of getting approved, and the same is true for borrowers whose financial situations are especially desperate. The most promising candidates are the ones in the middle of the affordability spectrum- those whose mortgage payments aren’t crippling and hence have a realistic chance of avoiding foreclosure with the help of a modification.
Those whose mortgages aren’t guaranteed by the FHA, but are owned by either Fannie Mae or Freddie Mac, are also in a fortunate position. Since Fannie and Freddie are in a government trusteeship, mortgage servicers don’t need the approval of private investors before approving a modification. [For those who aren't sure whether they fall into this category, you can enter your street address here to confirm]. Still, the mortgage services themselves must grant the approval, and as with FHA loans, they are compensated for the government for doing so.
Such servicers are looking for borrowers whose housing payments (principal, interest, taxes, and insurance) exceed 31% of gross monthly income. In this sense, borrowers whose income has fallen (but not disappeared) since taking out their mortgages, and those whose payments have increased (as a result of adjustable rate reset, for example) are the most likely candidates. Typically, such borrowers will have see their interest rate reduced to 2%, though loan balance/principal won’t be adjusted.
As with FHA loans, servicers are looking for borrowers that are in need of aid, but not desperately so. Borrowers without any income won’t qualify, because the risk of foreclosure will still be high after modification. Those with healthy savings or other assets also won’t qualify, since most servicers will judge them capable of making mortgage payments without a reduction. The key is “massaging” your financial position so that you fall into the sweet spot.