The federal Home Affordable Modification Program (HAMP) modifies home loans (mortgages) to make them more affordable for struggling homeowners. There are two levels or “tiers” under HAMP -- Tier 1 and Tier 2. Read on to learn more about how HAMP works, the difference between Tier 1 and Tier 2, and find out whether or not you may qualify for a HAMP Tier 1 or HAMP Tier 2 modification.
Understanding the Making Home Affordable Program
The Obama administration introduced the Making Home Affordable (MHA) program in 2009 to help homeowners avoid foreclosure. There are several different programs available to homeowners under MHA.
Depending on your situation, you may be able to:
- refinance your loan through the Home Affordable Refinance Program (HARP)
- leave your home without going through a foreclosure in the Home Affordable Foreclosure Alternatives Program (HAFA), or
- lower your monthly mortgage payment with a Home Affordable Modification Program (HAMP) loan modification. (To read more about government programs for struggling homeowners, visit Nolo's Government Foreclosure Prevention Programs area.)
The Making Home Affordable Modification Program (HAMP)
HAMP, which was announced on March 4, 2009, is the most popular MHA program. If you have a steady income, but you’re struggling to keep up with your mortgage payments, you may be able to modify your loan through a HAMP Tier 1 or HAMP Tier 2 modification.
HAMP Tier 1
HAMP Tier 1 is a basic HAMP modification.
Under Tier 1, a homeowner’s monthly mortgage payment, including principal, interest, taxes, insurance, and association fees, is reduced through a series of successive steps (called a “waterfall”) so that it equals 31% of the homeowner’s gross monthly income.
How the waterfall works. The servicer only moves on to the next step in the waterfall if the target payment has not been reached yet. If the payment is still too high after all of the steps have been exhausted, the lender will deny the modification.
HAMP Tier 1 Waterfall Steps
The steps in the HAMP Tier 1 waterfall work like this:
- The servicer capitalizes the arrears. The servicer adds up the outstanding amounts (missed payments, escrow advances, foreclosure fees, etc.) and then adds them to the unpaid principal balance.
- Interest rate reduction. The servicer reduces the interest rate in increments of 0.125%, though it will go no lower than 2%. (The interest rate reduction is generally for five years and then increases in steps until it hits the interest rate cap, which is based on the Freddie Mac Primary Mortgage Market Survey or “PMMS.” The weekly PMMS rate is available on the Freddie Mac home page at www.freddiemac.com.)
- Term extension. The servicer will extend the loan term (the time you have to pay back the loan), up to 480 months (40 years) to attempt to achieve the 31% target ratio.
- Principal forbearance. If after taking these steps, the payment still exceeds 31% of the borrower's monthly income, the servicer can defer a portion of the principal to the end of the loan (interest free). This results in a balloon payment when you sell the home or when the loan matures. (The maximum forbearance that servicers must consider is the greater of 30% of the unpaid balance after capitalization or the amount that the unpaid balance exceeds the home’s value.)
Alternative modification waterfall. If the mark-to-market loan-to-value (LTV) ratio is greater than 115%, the servicer is required to add a step to the waterfall (as step two) in which a portion of the principal is forgiven. (“Mark-to-market loan-to-value ratio” means the ratio of the loan value to the property value).
Net present value test. In addition, the modification must result in a positive Net Present Value (NPV) for the investor (that is, it is more beneficial for the investor to modify the loan than to foreclose) otherwise it will be denied. (Learn more about NPV in Nolo’s article Using the CheckMyNPV.com Tool in Mortgage Modifications.)
HAMP Tier 2
Effective June 1, 2012, the Obama administration expanded the HAMP program to borrowers who did not meet the eligibility requirements under the existing program (HAMP Tier 1).
HAMP Tier 2 is available to homeowners who:
- want to modify a loan on a rental property
- previously did not qualify for HAMP because their debt-to-income ratio was 31% or lower
- previously received a HAMP trial period plan, but defaulted in their trial payments, or
- previously received a HAMP permanent modification, but defaulted in their payments, and lost good standing. (You lose good standing if you fall 90 days or more behind on your payments under a HAMP Tier 1 permanent modification.) (Learn more in Nolo’s article If I Default Under HAMP, Can I Reapply?)
HAMP Tier 2 Waterfall Steps
The waterfall steps for Tier 2 are similar to Tier 1, with a few differences. For HAMP Tier 2 modifications, the loan is modified by:
- capitalizing the arrears
- adjusting the interest rate to the current PMMS rate (rounded to the nearest 0.125%) plus a “risk adjustment” expressed in basis points (currently 50 basis points)
- extending the loan term to 480 months, and
- principal forbearance or principal reduction.
Under HAMP Tier 2, the monthly payment must be within an expanded acceptable debt-to-income range of your gross monthly income, such as 10% to 55%.
Net present value test. In addition, the modification must result in a positive NPV for the investor.
Basic Eligibility Requirements
Under both Tier 1 and Tier 2, homeowners must meet the following basic HAMP eligibility requirements.
- You must have taken out the loan before 2009.
- The property can have no more than four units.
- You owe up to $729,750 on your primary residence or single unit rental property; up to $934,200 on a two-unit rental property; up to $1,129,250 on a three-unit rental property; or up to $1,403,400 on a four-unit rental property.
- The property has not been condemned.
- You have a financial hardship and are either delinquent or in danger of falling behind on your mortgage payments. (If you want to modify the loan on a rental property, you must be behind in payments in order to get a HAMP modification).
- You have sufficient, documented income.
- You have not been convicted within the last ten years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
How to Apply for a HAMP Modification
To apply for HAMP, you must submit a loss mitigation application along with supporting documentation such as pay stubs, tax returns, and bank statements to your mortgage servicer. (Your mortgage servicer is the company that you make your monthly mortgage payments to and that manages the loan account.)
Your servicer will evaluate your application and, if you qualify for HAMP, place you in a trial period plan for three months. If you make all of your trial period payments on time and meet any other trial period requirements, you will receive a permanent loan modification. (Learn more about how to request a HAMP modification from your servicer.)
Finding Out More about HAMP
To find out more about HAMP, visit the federal government's Making Home Affordable website.
HAMP is currently scheduled to expire on December 31, 2016.