One of your main options if you are facing a foreclosure is to modify the terms of your loan to reduce your monthly payments. While you may be able to get a proprietary modification through your lender, you also may be eligible for the Flex Modification program if Fannie Mae or Freddie Mac owns your loan. This program is the successor to the Home Affordable Modification Program (HAMP), which expired recently. Flex Modification is estimated to reduce mortgage payments by 20 percent.
Fannie Mae and Freddie Mac are government-sponsored enterprises that participate in the secondary mortgage market. This means that they buy a mortgage from the original lender and group it with other mortgages to sell to investors as mortgage-backed securities. Investors find these securities attractive because Fannie Mae and Freddie Mac often guarantee that investors will be paid even if the homeowner defaults on the mortgage. Read more here about how Fannie Mae and Freddie Mac work.
Requirements for Flex Modification
You can check the websites of Fannie Mae and Freddie Mac to find out if either entity owns your loan. If it does, you may be eligible as long as certain criteria are satisfied. For example, the Flex Modification program is available only for a first mortgage. You cannot use it if you have refinanced your home with additional mortgages. At least a year must have passed after the homeowner obtained the mortgage before they apply for Flex Modification. These are just some of the criteria, which are technical and detailed. Your mortgage servicer can advise you on whether you are eligible.
Steps in the Flex Modification Program
Flex Modification requires the mortgage servicer to reduce the homeowner’s payments on the loan by adjusting the interest rate, adding overdue payments to the remaining loan balance, extending the term of the loan, or setting aside part of the remaining principal. Any part of the principal that has been set aside is not eliminated but instead allocated to a balloon payment. The homeowner will need to pay this amount in a lump sum at the end of the loan term, or when they sell the home or refinance it if this happens before the end of the term. Each of these techniques will reduce the amount of the monthly payment.
If you miss payments on a Fannie Mae or Freddie Mac loan over a period of 90 to 105 days, the mortgage servicer must determine whether you are eligible for the Flex Modification program. This means that your mortgage servicer may offer it to you regardless of whether you have applied for it. Also, you can apply for the Flex Modification program at any time before the foreclosure sale. As long as you apply for the Flex Modification program at least 38 days before the foreclosure sale, the lender cannot proceed with the sale until it reviews your application.
Similar to other loan modifications, the Flex Modification program requires completing a trial period before the modification can be finalized. This consists of a few months in which the homeowner makes payments as required by the modification. Keeping up with these payments will automatically make the modification permanent. If you successfully enter the program, you probably will not be required to pay late fees and other penalties.