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.
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:
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 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.
The steps in the HAMP Tier 1 waterfall work like this:
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.)
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:
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:
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.
Under both Tier 1 and Tier 2, homeowners must meet the following basic HAMP eligibility requirements.
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.)
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.