| It used to be a prelude to foreclosure when a | | | | all fees and property insurance included. Late fees, |
| homeowner fell behind on the mortgage payment. | | | | however, are not included. |
| Lenders had no consistent set of guidelines on what to | | | | 3) They will calculate 31% of the borrower's gross |
| do when a borrower defaults, so they usually tacked | | | | monthly income. That is the target, known as the DTI |
| the missed payments plus late fees onto the principal | | | | (debt-to-income ratio). |
| of the loan without reducing the monthly payment. This | | | | 4) They will reduce the interest rate in 0.125% |
| did nothing to help homeowners, who were unable to | | | | increments to get as close as possible to the target |
| make monthly payments as it was. But now the | | | | DTI of 31%. The lender does not have to reduce the |
| President's Making Home Affordable plan offers a | | | | interest rate any lower than 2%. |
| clear, consistent set of loan modification guidelines to | | | | 5) If the 31% DTI hasn't yet been reached, the term of |
| follow in the case of a homeowner who can't meet | | | | the loan can be extended up to 40 years. |
| monthly mortgage payments. | | | | 6) If the 31% DTI still hasn't been reached, the lender |
| The goal is to modify the terms of a loan so that | | | | can start to forbear principal - although they do not |
| monthly payments are no more than 31% of a | | | | have to. That amount will be due in a balloon payment |
| person's gross monthly income. When an eligible | | | | upon maturity of the loan. |
| homeowner is determined to be at risk of falling behind | | | | Lenders will get incentive payments for every modified |
| on payments or facing foreclosure, lenders have a | | | | loan that they perform. If they follow the Standard |
| clear set of guidelines to follow. This set of guidelines is | | | | Waterfall outlined above, run a cost analysis, and |
| known as the Standard Waterfall. In the Standard | | | | determine that with the incentive payments they will |
| Waterfall, here are the steps lenders will follow: | | | | have a better financial outcome than if they foreclosed |
| 1) They will request the borrower's monthly gross | | | | on a home, they will modify your loan. After a |
| income and get verification of that income through tax | | | | successful three-month trial period with the new terms, |
| documents. | | | | the new interest rate will remain in place for the next |
| 2) They will add up your current monthly payment with | | | | five years. |