New home loan modification rules coming

If you want to get a modification to prevent foreclosure, soon you will have to supply financial documents upfront -- including paycheck stubs and an income tax form.

The new loan modification requirement is the latest update in the Obama plan to reduce home foreclosure.

HAMP -- the Home Affordable Modification Program -- is designed to help homeowners who can no longer make their mortgage payments. If homeowners meet a long list of eligibility requirements, they can have their mortgages modified with lower monthly payments. Each HAMP modification is done in two stages. First, there is a trial modification that usually lasts three months. If the homeowner makes those three payments on time, and meets all the eligibility rules, the modification is made permanent.

One of the eligibility requirements concerns income. To get a permanent modification, the borrower can't earn too much and can't earn too little. Too much income and a modification is unnecessary because the mortgage should be affordable. Too little income and the borrower can't afford the home loan even with a modification.

Right now, a lot of servicers grant trial modifications based on what the borrower says in a phone call. Many borrowers report their income inaccurately in that phone call. They say that they earn less than they actually make. They get trial modifications based on lowballed income. Later, after they send in paycheck stubs or other proof of income, it turns out that they make too much to be eligible for permanent modifications.

Financial proof required

A few servicers ask for income documentation upfront. Now the federal government wants all servicers to do it that way.

By June 1, mortgage servicers will have to gather income information from borrowers before granting trial modifications. In addition to that, borrowers will have to sign an IRS form, either 4506-T or 4506T-EZ, which authorizes the mortgage servicer to get a transcript of the most recent federal income tax return. Finally, the borrower has to sign a document officially requesting a mortgage modification and explaining the hardship that makes the home loan unaffordable.

Through December, 902,620 homeowners had been given trial modifications, according to the U.S. Treasury. Of those, just 66,465 had been given permanent modifications, and another 46,056 offers of permanent modifications were "awaiting only the borrower's signature." In other words, only 1 in 8 people getting trial modifications had been offered permanent mods. The Obama administration wants to increase that conversion rate.

In recent months, the Treasury has issued report cards showing which servicers had been granting lots of loan mods, and which servicers had been giving few. But the report cards didn't discriminate between servicers that collected all the financial paperwork upfront giving trial modifications, and which servicers granted trial mods based on the borrower's word during a brief phone call.

Thus, companies such as American Home Mortgage Servicing, which has always required the paperwork upfront, looked like laggards because the report cards said they had only a few borrowers in trial modifications. But fewer of those trial mods will go bust because the borrowers weren't given a chance to fudge their income numbers over the phone. The government's new policy is an acknowledgement that getting the documentation upfront was the best policy.

Documents you'll need to send before you can get a trial modification
Request for Modification and Affidavit form (called the RMA)

• This document contains basic financial information, as well as a description of the cause of the financial hardship. It must be signed.
IRS Form 4506-T or 4506T-EZ

• This form authorizes the mortgage servicer to request a transcript of the most recent federal income tax return. The form must be signed. Don't expect the authorization to go unused; the servicer is required to get the tax return transcript.
Evidence of income

• Most borrowers will be required to submit two recent pay stubs that indicate year-to-date earnings.

• Servicers may make adjustments when they deem it unlikely that commissions and bonuses are unlikely to continue.

• Self-employed borrowers will be asked to submit the most recent quarterly or year-to-date profit and loss statement. It doesn't have to be an audited financial statement.

• People with other types of earned income -- tips, overtime, bonuses, commissions, fees, housing allowances -- will be required to submit "reliable third-party documentation."

• For benefit income -- Social Security, pension, welfare, disability or death benefits -- the borrower needs to submit a benefits statement of some type, along with receipt of payment, such as copies of the two most recent bank statements.

• People drawing unemployment benefits are eligible, in some cases, for modifications. They will need a monetary determination letter or other evidence of the amount, duration and frequency of benefits.

• Rental income is included in Schedule E of the income tax return. In the absence of an up-to-date Schedule E, the borrower can submit a current lease agreement and canceled rent checks.

• Borrowers aren't required to include income from alimony, separation maintenance or child support. But they can include such income if they wish. It has to be documented with court papers and bank statements.



Source: Bankrate