The Home Affordable Modification Program (HAMP) and Modifications, Generally

The Home Affordable Modification Program (HAMP) is a federal program designed to help homeowners who are currently struggling to make their mortgage payments. In a nutshell, the program seeks to modify loan repayment to be no more than 31% of a borrower's gross monthly income.

There are a handful of requirements in order to be eligible for the HAMP modification. The first is that the borrower must prove that she is delinquent on the mortgage and/or faces a risk of default. Thus, a lender my claim that a borrower is not eligible if they have been current on their mortgage payment, for lack of indicia that the borrower cannot afford the payment. Often enough, borrowers are advised to intentionally miss a couple of payments in order to show inability to pay. Other requirements are that the property in question must be the borrower's primary residence, i.e., owner occupied. Additionally, the mortgage must have originated prior to January 1, 2009 and the unpaid principal balance cannot exceed $729,750.00 for single-unit properties.

If the borrower qualifies, she may be given a modified loan whose monthly payment does not exceed 31% of her gross monthly income. This can be achieved by reducing the interest rate, extending the loan term up to 40 years, forbear a portion of the principal without it accuring interest during the forbearance, or simply reducing the total principal balance to achieve the target monthly payment.

In addition to HAMP, many lenders offer their own modification programs. Refer to your lender for documentation on these modification opportunities. Either way, obtaining a modification on a mortgage can go hand-in-hand with bankruptcy. A debtor who is behind or in arrears on their mortgage must repay the arrears in full through her chapter 13 plan, in order to keep the property. Arrearage payments must be made on top of the prospective monthly mortgage payment, and such a plan is often unfeasible if the debtor could not afford the mortgage payment on its own. Obtaining a modification can wipe away those arrears, allowing a debtor who was behind on payments the possibility of filing a chapter 7 and keeping the property, or, if the debtor seeks to strip a second or junior mortgage, file a chapter 13, either in order to discharge/manage other debt. Likewise, a modification may obviate the need to file bankruptcy altogether.

It is worth mentioning that filing bankruptcy in the midst of a modification may frustrate the process. It is best to contact the lender and find out what their policy is regarding bankruptcy. One inherent risk in the modification process is the uncertainty of whether the modification will ultimately be granted. Often enough, borrowers will be placed into a trial period where they will demonstrate their ability to make the reduced payments on time, only to find out months later that they have been denied. This, in and of itself, can force the borrower into bankruptcy; the arrears continue to accrue by way of the difference between the original mortgage payment owed and the trial period payment paid during the trial period. If the borrower desires to keep the house, she must file a chapter 13 to repay those arrears.