When a struggling homeowner needs to make a mortgage more affordable, he may request a loan modification. A modification changes one or more features of a loan to reduce the monthly payment and keep a borrower out of foreclosure. Modification availability and programs vary by lender and the borrower’s individual financial circumstances. The federal government streamlined the loan modification process with the Home Affordable Modification Program, or HAMP.
HAMP Tier 2 Introduced
The government modified HAMP guidelines with HAMP Tier 2. Its predecessor, HAMP Tier 1, was established in 2009 to encourage lenders and borrowers to modify loans under a unifying set of guidelines. Borrowers and their properties must meet HAMP qualifications, and the modification must result in a monthly payment that meets certain criterion. HAMP Tier 2, which was introduced in 2012, included changes to qualifying criteria and modification outcome. As of the time of publication, the HAMP and its governing initiative — Making Home Affordable — were scheduled to end on Dec. 31, 2015.
Most HAMP Tier 2 basic requirements remain the same as those of HAMP Tier 1. The home loan must have originated — closed — on or before Jan. 1, 2009; the property must have one to four units; the loan amount for a single-family home can be no higher than $729,750, and no higher than $1,403,400 for four units. The property can not be condemned; financial hardship must be the cause of current or imminent default; the borrower must have income to make modified payments; and the borrower must have no felony convictions related to mortgage or real estate within the past 10 years.
Modified HAMP Rules
HAMP Tier 2 guidelines expanded eligibility to more homeowners than HAMP Tier 1 guidelines. HAMP Tier 2 allows non-owner occupant properties; therefore, a borrower can modify a rental property or a vacant home as long as the borrower intends to rent it. Borrowers who didn’t qualify under HAMP Tier 1 because the total monthly housing payment fell short of 31 percent of gross income; or who previously failed a three-month Tier 1 trial period, could qualify for a modification under Tier 2. The second-tier program also allowed borrowers who received a permanent Tier 1 modification, but later defaulted, to receive another modification.
HAMP Tier 2 Outcomes
HAMP Tier 2 usually results in a total housing payment equal to about 31 percent of the borrower’s gross income. Lenders participate in HAMP on a voluntary business and usually review the borrower’s income, employment and assets, as well as the home itself, to determine eligibility. HAMP Tier 2 criteria also allows a wider range of debt-to-income ratios. A HAMP lender may deem a borrower eligible for Tier 2 if housing payments are within 25 percent to 42 percent of gross income. Some HAMP lenders can even modify borrowers with DTIs between 10 percent and 55 percent.