Loan Modification Programs aren't something new, but many will argue the old system wasn't structured properly to work. A recent example of this is - over half of the loans modified in the US from January to March 2008 defaulted on their modified loan before the end of the year.
What Exactly is Loan Modification?
As you are well aware the economy has taken a huge downturn over the last couple of years. This has had an undesired effect for many homeowners. People find their loans are at risk and the possible threat of foreclosure. This is where lenders will offer lower monthly repayments and set terms and conditions on your home loan for a specified period of time. However, with no real structure in place, this was doomed to fail.
The Obama administration unveiled their new program on Wednesday 4th March 2009. This program planned to restructure home loans and save millions of Americans from foreclosure.
So What is the 31% Rule?
The program requires lenders to reduce your monthly mortgage repayments to no more than 38% of your gross monthly income. The government will then fund the remainder, to bring your payments down by a further 7%. This would mean that your monthly mortgage repayments would be no more than 31% of your total gross monthly income.
In order for your lender to achieve this, they would first need to lower the interest rate on your loan and possibly extend the term of your mortgage. They have the ability to lower the interest rate to 2% and extend your term up to 40 years. However, even after all these alterations, if you are still paying above 31% threshold, the lender can merely claim payments for your principle balance and will charge no interest.
For you to secure help to join one of these Programs, you will usually need to approach a Loan Modification Company. Although, many people have reported savings in excess of $500 per month on their mortgage payments, others have told horror stories of the fees that some of these companies charge.