The loan modification process involves a standard method of loan modification to new affordable monthly payment terms. This is called the Cascade Method and its use is required under the Treasury Department’s loan restructuring plan. This plan is called HAMP – for the Affordable Housing Modification Program. When your lender reviews your application, part of the process will be determining whether your loan and financial circumstances will fit this method of modification.
The loan modification process begins when a borrower contacts their lender and requests consideration for HAMP. It is important to specifically request this plan because lenders must review each and every homeowner applying for assistance under this plan. While your file is being reviewed to determine your eligibility, the lender cannot move your home up for sale due to foreclosure. So this gives you some time and a second chance to save your home with a loan deal.
Once you complete your loan modification application and submit it along with your income documentation, your entire package will be reviewed for eligibility and acceptability. Here is the basic loan modification process:
- Homeowners Request Consideration for HAMP
- Borrower completes application packet and provides proof of income
- The lender reviews the information provided by the owner to determine your eligibility.
- Cascade Modification Method Tried and Acceptability Determined
- If the loan can be modified using the standard terms, then the owner can be approved for a loan modification.
- The owner enters a 3-month trial modification period, after which the modification becomes permanent
How exactly does the Waterfall mod method work? This standard formula uses several criteria to determine which loans and borrowers will be eligible. Remember that the owner is providing his financial information: monthly income, monthly expenses, cash in the bank, etc. – on your application form and this is the information that is used to determine if the owner qualifies. The lender will use standard methods to reduce the current mortgage in order to meet a new target mortgage payment. This new payment will equal 31% of the gross monthly income reported by the borrowers and includes principal, interest, taxes, insurance and any HOA owed.
The first step of the Waterfall method to reach the target payment is to reduce the interest rate, and the rate can go down as low as 2%. If more changes are needed to reach the goal, then the loan term can be extended to 40 years. The final step is to forgive or defer part of the principal balance to reach the new desired target payment. This is called the Cascade Method because the lender must follow these steps in order, as needed. However, if the borrower’s income is too low or too high, or if the loan balance is so high that a large principal reduction would be required, the loan modification may be declined.
Homeowners waiting to be approved must understand how the loan modification process works and, more importantly, how they must complete their financial statement to be acceptable. Knowing in advance how much income you need to prove to qualify will allow you to make the necessary adjustments and submit an acceptable application. If you knew that just by cutting a couple hundred dollars a month in expenses you would meet the guidelines, then you certainly would, right? This is confusing for borrowers, but you can use a loan modification software program that will actually show you how much income you need and where you may need to adjust your figures to fit the standard HAMP guidelines.