Under the Obama administrations new "Making Home Affordable" initiative or (MHA), up to 4 million eligible homeowners may be able to receive loan modifications with interest rates as low as 2 percent.
Originally called the "Homeowner Affordability and Stability Plan" the newly renamed initiative's plan is to help modify mortgages for qualified homeowners having difficulty making their monthly payments due to financial set-backs.
Unlike a refinance, a loan modification changes the terms of the current loan without starting over and writing a new loan. They are designed to make mortgages more affordable and help the owners stay out of foreclosure.
The MHA is open to anyone including homeowners who haven't missed any payments and anyone with a loan that is under Fannie Mae and Freddie Mac limits, which is now as high as $729,750.
This program is also designed to standardize many various loan modification efforts by other lenders and the MHA comes with financial incentives for both lenders and homeowners alike.
While borrowers get a reduction in their principal and thousands of dollars over five years for paying on time, loan servicers also get thousands of dollars for modifying the mortgages.
Modifications through the MHA are designed to reduce the mortgage payment to as little as 31% of household income by making the monthly cost of housing more affordable. This can be accomplished in several different ways including reducing interest rates, extending the life of the loan and/or reducing the principal. Unfortunately, most lenders have stonewalled on forgiving debt.
To reach the 31% level, first, interest payments will be lowered to as low as 2%. If the rate of debt to income level is still over the 31% level, then lenders will extend the life of the loan up to 40 years. Lastly, the lenders will set the principal at no interest until the monthly payments are reduced to or below the 31% mark.
The MHA program carries through 2012 and only allows borrowers to modify their loan once and applies solely to loans closed on or before Jan. 1 2009. Single-family home mortgages worth more than the Fannie Mae and Freddie Mac limit of $729,750 will be excluded.