This chapter covers Federal Housing Administration (FHA) and Veterans Administration (VA) mortgage modification programs. The programs may or may not be restricted to FHA or VA loans. For other federal mortgage loan modification programs, in particular those offered through Fannie Mae and Freddie Mac, please see the following chapter of this guide.
Understanding Federal Loan Modification Programs
There are a variety of mortgage loan modification programs available at the federal level to assist homeowners who are looking to have their mortgages modified. Guidelines are outlined here, and borrowers looking to find more specific information should contact either any of the agencies listed here, or a mortgage professional.
The Federal Housing Administration (FHA) has two mortgage modification programs. They are FHA Secure, and Hope for Homeowners
FHA Secure is a program for mortgage holders who have Adjustable Rate Mortgages that have reset to a higher rate, putting their mortgage payment out of reach for them. Borrowers may apply for the program while they are in default.
Borrowers who qualify can be refinanced into a fixed-rate mortgage with a payment they can afford. The borrower must demonstrate that they were able to make their mortgage payments prior to the rate adjustment, and defaulted only after the reset.
The FHA will charge an upfront premium at the time the loan is taken out, as they do with all borrowers (This premium is financeable). Then, based on the credit profile, they will also charge a monthly insurance premium.
Hope for Homeowners (FHA)
Hope for Homeowners is another FHA-based program. It offers incentives for lenders to reduce the principal on a mortgage where the value of a property has declined to less than the balanced owed, in return for refinancing into an FHA-insured mortgage. Congress modified the program in May 2009 to make it more attractive to lenders after only a handful of borrowers received assistance in the first seven months of the program. The requirements are:
- The property on which the mortgage to be modified must be the primary residence of the borrower. That property must be the only property that the borrower owns, meaning they have no second home or investment properties.
- The mortgage must have been taken out before January 1, 2008, and the borrower must have made at least six payments on that mortgage.
- The borrower must be able to demonstrate that they are unable to pay the mortgage without some type of assistance.
- The borrower, when they took out the mortgage, must have had a mortgage debt ratio of 31 percent or less. This means, for example, that if their gross monthly income was $5,000, the payment, including, taxes and insurance was no more than $1,550 ($5,000 x 31 percent).
- Borrowers must certify that they have no fraud convictions in the last 10 years, and that the information that they provided on their original loan application, including income, was correct.
This is specifically for FHA-insured loans, and is for borrowers who are at least four months delinquent on the property where they live. The lender advances part or all of the past-due payments and fees to the borrower in the form of a zero-interest subordinate mortgage. This “partial claim” is then added on to the end of the mortgage, or becomes due when the property is either sold or refinanced.
The borrower must be able to document the hardship that caused them to miss the payments. They must also be able to prove that they are now capable of making the full mortgage payment, and are unable to make up the missed payments and fees.
Veteran’s Administration (VA)
Veteran’s Administration loans are a bit different in terms of modification than either conventional loans (Fannie and Freddie) or FHA loans, as the VA has no broad loan modification program, as do the other three agencies.
This means that borrowers should call their specific lender and ask for a VA Loan Modification Package. This will describe what their particular lender is looking for, and what terms they are able to offer.
In some cases, if a modification cannot be worked out, the Veterans Administration will buy back the loan. Borrowers should check with their mortgage professional for details.
While VA borrowers are inquiring about a modification, they should also ask to see if they qualify for a VA Streamline Refinance, which may help to bypass the modification process. A streamline refinance can, unlike a loan modification, can be done by any lender offering VA loans.