The Federal Loan Modification Program Explained

The federal government offers loan modification for individuals at risk of losing their home in a foreclosure. This process is not available to all borrowers, and it actually applies to a narrow window of qualified individuals. To determine if this is an option for you, learn the basics of the program.

Subprime Borrowers

The federal loan modification program is only available to borrowers who previously secured subprime loans. Subprime loans are those extended at a rate lower than the national prime rate. This means the bank or lender was actually losing money on the loan initially. Lenders only agree to do this because the promise of future profits is high once the rate adjusts. Subprime borrowers are not typically qualified for standard loans. As such, some lenders may have been engaging in predatory lending methods in order to secure these loans. If you have a subprime loan, you may qualify for the federal modification program.

Variable Rate Loans

Variable rate loans adjust to a higher interest over time. A lender cannot extend a loan lower than the national prime and continue that loan beyond a few years. Instead, the lender will raise rates sharply. Borrowers are convinced to take these loans under the belief their incomes will also go up over time. When this does not happen, though, borrowers may no longer be able to afford the loan, leading to foreclosure. If this applies to you, you will have to show you were making your payments consistently at the lower rate prior to the adjustment to qualify for a federal modification through an FHA mortgage loan refinance to a fixed rate loan.

Proof of Ability to Pay

The FHA will not extend the option for loan modification to a person or family that cannot afford the loan at a lower rate. Ask yourself this: if the FHA lowers your interest to a moderate, fixed rate, and drops your monthly payments, can you afford to stay in your home? If you answer "no," you may be in a situation where no amount of modification can help you avoid default. This is typically the case for borrowers who could not afford ownership of their home to begin with, even without interest. As such, it is a better option to pursue a short sale or protection through bankruptcy. If you can continue making payments, you will have to confirm this ability to pay through confirming your income.

Modification Terms

If you do qualify for the FHA loan modification program, you will have access to a number of benefits. First, you get out of a bad loan. Second, you get to remain in your home under the protection of a much better loan. For borrowers who were classified as subprime to begin with, this affordable loan option is a blessing. You should know the new FHA loan will be less flexible than a private mortgage. There will be limits to how much further debt you can assume. You will also suffer a great consequence if you default on this loan.