Loan Modification

Got an FHA Loan? There?s a HAMP for That!

By Gina Pogol

New and Improved! Borrower Pay-for-Performance Compensation

FHA-HAMP was unleashed in July 2009 to help troubled homeowners with FHA mortgages. And now, the program has some new updates.

FHA-HAMP is not just regular HAMP with a longer acronym. It’s very different from the Fannie / Freddie (and non-GSE) program. FHA is prohibited by federal law from permanently reducing the principal balance on the mortgages it insures, but the agency allows up to 30% of the balances to deferred (and not accrue interest) until the properties are sold. Another significant difference is that FHA-HAMP does not make use of NPV testing. This is a calculation lenders can use for conventional HAMP to determine if it’s more profitable for them NOT to modify your loan (and perhaps foreclose). If it is, you are out of luck! The absence of the NPV test is a huge help to FHA borrowers.

Pay for Performance

If you are granted a qualifying loan modification, you can also earn “pay for performance” bonuses, which are applied annually to reduce your principal balance. The maximum annual bonus you can get is the lower of $1,000 ($83.33/month), or half of the annual reduction of your payments. You earn it monthly every time you pay your mortgage on time,  for up to five years.

Many Options

FHA-HAMP is one of many options available to FHA borrowers. You may also be offered a claim advance, which can be used to bring arrearages current, a modification, which can lower your interest rate and payment, or short sale / deed-in-lieu alternatives for those who can’t or don’t want to keep their homes.

Other Considerations

FHA-HAMP requires that your total debt-to-income ratio not exceed 55%. So if your other debts are too high you might not qualify even if your housing expense is brought down to 31% of your gross income. If total of housing expenses (principal, interest, property taxes, HOA dues, and hazard insurance) plus all of your other expenses exceeds 55% of your gross income, you will not be offered FHA-HAMP. You will have to reduce those payments first, either through debt management, settlement, or bankruptcy. HUD strongly encourages FHA borrowers to get financial counseling and learn how to manage payments.

In addition, if you become more than 12 months in arrears on your mortgage, you are ineligible. You’d need pay at least some of the arrearages to become eligible.

Full post as published by FHA Mortgage Guide on April 19, 2010 (boomark / email).