For homeowners who are having difficulty meeting their mortgage payments, a loan modification can help them avoid foreclosure and stay in their homes. Most lenders offer some sort of loan modification options, but a government-sponsored loan modification under the Making Home Affordable (MHA) Plan offers one key advantage borrowers should be aware of.

The Making Home Affordable Plan offers a different type of loan modification from what most private lenders will offer. The government plan offers a reduction in the mortgage interest rate, thereby lowering the actual cost of the loan to the borrower. Standard loan modifications arranged with one's lender may defer or repackage costs to make them more manageable, but rarely provide a net reduction in payments over the life of the loan.

Reduced interest rate for at least five years

The way this works is that the government provides incentives to your lender to reduce the interest rate on your mortgage so that your monthly payments are no more than 31 percent of your gross income. If you're able to maintain those payments for a three-month trial period, the new interest rate is fixed for five years. After five years, it may rise to a higher rate predetermined in the loan modification agreement.

To qualify for the program, homeowners have to be able to show that they are in financial difficulty and cannot afford their current mortgage payment. This can be due to a loss of income or increased expenses, such as a medical situation or an adjustable mortgage that has reset to a higher rate. You must be able to convince the lender that you will be able to keep up with the new, lower payments - those with a total loss of income will not be able to qualify.

High demand may lead to delays

You do not have to be behind on your mortgage payments to qualify for the program, but may face longer delays in getting approved than borrowers in more serious financial straits. Demand for the program has been high and many lenders are focusing first on customers who have fallen behind. Borrowers who are current on their payments may also find a better option in refinancing, rather than modifying, their loan under MHA, for which there are different guidelines.

Other requirements include that the mortgaged property must be your primary residence, have an unpaid balance of less than $730,000 for a single-family home (you may also be the owner-occupant of a multiunit property of up to four units) and your total mortgage payment exceeds 31 percent of your monthly income.

Foreclosures often deferred during process

For borrowers who meet the program requirements, the program offers an added benefit in that many lenders have agreed to hold off on any foreclosure actions while the application is under consideration. However, applicants who are current on their payments but fall behind during the application process will still negative effects on their credit rating.

The program is voluntary for lenders - they may determine on a case-by-case basis who they wish to offer an MHA loan modification to. However, the incentives the government provides are designed to make it in their best interest to do so, particularly if the alternative is taking a loss on the property when it goes into foreclosure.

To apply for the program, you contact your lender or mortgage loan servicer - their contact information will be on your mortgage statement. You may contact HUD or other government agencies affiliated with the MHA program for information, but your actual application is filed through your lender or servicer.

Assemble information before calling

Before calling, it's a good idea to begin assembling the information you'll need to file your application. This includes documentation of income, your most recent federal tax return, documentation of any assets held, documentation of ongoing expenses and debts, and a written explanation of what caused your mortgage to become unaffordable.

Many of the nation's largest lenders have signed up to participate in the program, including Bank of America/Countrywide, Wells Fargo, Chase and 11 others. Additional information on their specific application procedures is provided on their web sites.

For general information on the Making Home Affordable Plan, including a list of participating lenders and services, see the Making Home Affordable web site.

    Published on June 12, 2009