The insurance modification process includes a standard method of modifying insurances to new, affordable monthly repayment terms. This is called the waterfall method and is mandatory for use under the Treasury Insurance Pilot Scheme. This plan is called HAMP – The Affordable Home Modification Program. When the lender reviews your application, part of the process is to determine if your insurance and financial circumstances will suit this method of adjustment.
The insurance modification process begins with a borrower calling the lender and asking for HAMP in return. It is important that you request this plan specifically because lenders are required to review each homeowner who requests assistance under this plan. While your file is being reviewed for eligibility, the lender is not allowed to move your home forward for a foreclosure sale. So this gives you some time and a second chance to salvage your home with a insurance exercise.
Once you complete your insurance modification application and submit it with your income documentation, the entire package will be reviewed for eligibility and acceptance. Here is the basic insurance modification process:
- Homeowners are asked to consider HAMP
- Borrower completes application package and provides proof of income
- The lender reviews the information provided by the homeowner for eligibility
- A method has been attempted to modify the waterfall and determine the acceptance
- If the insurance can be modified using the standard terms, the homeowner may be approved to modify the insurance
- The homeowner enters a trial modification period of 3 months, after which the modification becomes permanent
How exactly does the waterfall modification method work? This standard formula uses several criteria to determine eligible insurances and borrowers. Remember that the homeowner provides their financial information—monthly income, monthly expenses, cash in the bank, etc.—on their application form and this is the information used when determining whether the homeowner qualifies. The lender will use standard methods to reduce the existing mortgage in order to meet the new target mortgage payment. This new payment will equal 31% of the borrowers’ gross monthly income and includes principal, interest, taxes, insurance and any home-level dues.
The first step in the waterfall method to reach the target payment is to reduce the interest rate, and the rate can go down to 2%. If further changes are required to reach the target, the insurance term may be extended to 40 years. The final step is to waive or defer some of the principal balance to reach the new target payment required. This is called the waterfall method because the lender must follow these steps in the order as needed. However, if the borrower’s income is too low or too high, or the insurance balance is so high that it requires a significant reduction in the principal, the insurance modification may be refused.
Homeowners hoping to gain approval need to understand how the insurance modification process works and most importantly how they must complete their financial statements so that it is acceptable. If you know in advance how much income you need to prove eligibility, you will be able to make the necessary adjustments and submit an acceptable application. If you knew that once you carve out a few hundred dollars a month in expenses, you would fit the guidelines, then you would definitely do, right? This is confusing to borrowers, but you can use insurance modification software that will actually show you how much income you need and where you may need to adjust your numbers to fit standard HAMP guidelines.