Those who don't qualify for refinancing are often considered good candidates for loan modification under the Obama mortgage program. Be sure you fully understand your responsibilities when applying for loan modification.

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What Happens Once I am Approved for Loan Modification?

If you need homeowner relief through the Home Affordable program, you'll be asked to pass a screening process to determine eligibility for refinancing or loan modification. Those who don't qualify for refinancing are often considered good candidates for loan modification under the Obama mortgage program. Whether you hold a conventional mortgage or a Fannie Mae or Freddie Mac home loan, once you are approved for loan modification you should be aware of several issues once the screening process ends and you have been approved for loan modification.

After your initial eligibility screening, you'll need to calculate how much interest rate reduction you would need to bring the Fannie/Freddie mortgage or conventional loan payments within 31% of your gross income per month. If a rate reduction alone is not enough to decrease your payments, your lender has the option of extending your mortgage to 40 years. This will help lower the amount you owe each month along with an interest rate reduction. Your lender also has the choice to defer payment on a portion of your mortgage--what the lending industry calls a “principal forbearance.” In some cases the lender may forgive a portion of your mortgage.

You may need to run a “value test” to show whether homeowner relief is “less costly for the investor than not modifying the loan” according to the Home Affordable official website. If you have a lot of equity in your home or if your income is too low in comparison to the value of the home, you may not be ultimately approved for the loan modification, but you won't know for sure until the figures are calculated. For homeowners who do qualify for loan modification, there is a three-month trial period. You get a modified home loan payment for 90 days, with a new interest rate and payment level. Before you can be approved for a “permanent” loan modification agreement you must make all payments on time during the trial period. Don't miss any payments or make late payments--you will lose your eligibility to get an Obama mortgage.

Be sure you fully understand your responsibilities when applying for loan modification. Again, borrowers who don’t pay on time in the 90 day trial period are considered a bad risk and will be denied permanent loan modification plan. Borrowers must sign a statement indicating that all information provided to qualify for loan modification are true. Misrepresenting your finances, financial hardship, or employment situation has serious consequences.

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