Until now, financially pressed homeowners with an FHA-backed mortgage couldn't obtain a loan modification under the generous terms of the government's Making Home Affordable Program (MHA). But that's about to change.

New guidelines announced today by the U.S. Department of Housing and Urban Development (HUD) will allow FHA borrowers to seek to reduce their monthly mortgage payments through an MHA loan modification beginning Aug. 15.

The program will allow at-risk borrowers with FHA mortgages to reduce the principal on their loans by up to 30 percent through a process called a partial claim. The amount by which the principal is reduced is rolled into a second, no-interest mortgage that does not come due until the first mortgage is paid off or the property is sold or transferred.

Offers reduction in mortgage principal

By reducing the principal on the primary mortgage, the homeowner's monthly mortgage payment can be reduced as well to a more affordable level. This is a different approach than is offered through the regular MHA loan modification program, in which the principal is untouched, but the mortgage interest rate is reduced to bring the monthly payment down to 31 percent of the homeowner's monthly income.

The new FHA loan modification program still has a target of reducing monthly mortgage expenses to 31 percent of the borrower's income, but does so by reducing the principal on the primary mortgage. The remaining principal of the FHA mortgage is re-amortized into a 30-year fixed rate mortgage to achieve the desired monthly payment level.

Brings mortgage payments current

An added attraction of the FHA loan modification program is that the partial claim is used to not only reduce the principal and monthly payments on the primary mortgage, but also rolls any past due payments into the second mortgage as well, thereby bringing the borrower up-to-date on their mortgage payments.

To qualify for the program, called FHA - Home Affordable Modification, a homeowner must be in default on their mortgage but no more than 12 months past due. The program defines being in default as being at least one month past due on their current payment.

The borrower must be an owner-occupant of a single-family residence and have sufficient financial resources to keep up with payments on the modified mortgage. Borrowers also must not have deliberately defaulted on their mortgage payments or defaulted despite having financial reserves that could have been used to make mortgage payments. Their total recurring debt after modification, including nonmortgage debt payments, cannot be more than 55 percent of their monthly income.

Incentives for lenders

The FHA is providing incentives of up to $1,250 per loan modified to lenders to encourage them to participate in the program. To apply or to obtain more information, homeowners with an FHA loan should contact the mortgage lender or servicer holding their current FHA mortgage.

Homeowners without an FHA mortgage may seek to obtain a loan modification or refinance through the original Making Home Affordable loan modification or refinance programs.

Published on July 30, 2009