| Many Consumer's have heard of the Home | | | | |
| Affordable Modification Program ("HAMP"). This is | | | | 1. Gross Monthly Income-the amount before any |
| the Federal loan modification program. However, | | | | payroll deductions. |
| what most consumers do not realize is that the | | | | 2. The total first mortgage debt and monthly |
| calculation of a new mortgage payment is very | | | | payments (PITIA). This includes principal, interest, |
| guideline specific. The following is a detailed | | | | taxes, insurance, and homeowners association and |
| explanation of how the program calculates the | | | | or condominium fees. |
| new or modified payment under HAMP. | | | | The calculation to reduce the interest rate to |
| The goal for borrowers, as they seek a HAMP | | | | reach the Front-End DTI Target is subject to a |
| Modification, is a Front-End Debt-to-Income of | | | | floor of 2%. The rate reduction shall be made in |
| 31%. In plain English this ratio measures the | | | | increments of 0.125%, with the goal of bringing |
| percentage of monthly gross income that is | | | | the monthly payment as close as possible to the |
| consumed by debt and housing payments. This | | | | Front-End DTI, without going below 31%. |
| rate considers the value of consumer expenses | | | | If the modified interest rate is at or above the |
| compared to the borrower's gross monthly | | | | highest allowed by the original mortgage note, the |
| income. This calculation begins with the reduction | | | | modified interest rate will be the new note rate |
| of mortgage payments by the investor to no | | | | for the remaining loan term. If, however, the |
| more than 38%. The subsequent reductions by | | | | modified interest rate is below the maximum |
| the lender, to get to the target of 31%, rest on | | | | allowed rate in the note, the modified interest |
| the reduction of the borrower's interest. If, | | | | rate will be in effect for the first five years, |
| however, the reduction reaches the floor of 2% | | | | followed by annual increases, until the interest rate |
| without reaching 31%, the borrower may need to | | | | reaches the interest rate cap, of up to 1% per |
| account for the difference with annual increases | | | | year. The interest rate will be fixed once the it |
| of the interest rate. | | | | reaches the interest rate cap. If the Front-End |
| Once the lender reduces mortgage payments to | | | | Debt to Income target has not been reached, the |
| no more than 38% Front-End Debt-to-Income | | | | term of the loan shall be extended up to 40 |
| ratio, the Federal Government will match further | | | | years |
| reductions in monthly payments down to 31% | | | | It should be noted that there is no requirement to |
| Front-End Debt-to-Income ratio for the borrower. | | | | use principal reduction under HAMP, but servicers |
| At this point, lenders may capitalize arrearage. | | | | may forgive principal to achieve the Front-End |
| The target Front-End Debt-to-Income (DTI) is | | | | Debt-to-Income target. Consumers should recall |
| 31%. The Standard Waterfall step that results in a | | | | that the goal is to reduce Front-End DTI to 31%. |
| Front-End DTI closest to 31% without going | | | | By forgiving principal, monthly payments (as part |
| below 31% will satisfy the Front-End DTI Target. | | | | of the PITIA calculation) are drastically reduced, |
| Front-End DTI is the ratio of PITIA to Monthly | | | | thus reducing to overall ratio. |
| Gross Income. | | | | |