What Is the HAMP Program for Loan Modification?

The Home Affordable Modification Program is a federal program designed to aid homeowners who are having difficulty making their mortgage payments. If a homeowner qualifies, the program guides lenders through a series of steps designed to reduce the mortgage payment to under 31 percent of the homeowner's monthly income.

To be eligible, a homeowner must have a mortgage obtained before January 1, 2009, and must be either delinquent on the mortgage or facing a financial hardship that threatens to put the homeowner behind on the payments. The homeowner cannot owe more than $729,750, and the property must not have been condemned. The homeowner also must not have been convicted of a crime relating to real estate or a mortgage transaction in the last 10 years.

HAMP applies a series of adjustments to the mortgage to reduce the payment while maintaining an acceptable rate for the lender. First, the payment is reduced to 31 percent of the homeowner's income. If this would reduce the effective interest rate below a set floor, the length of the loan can be extended up to 40 years. If this still results in an effective interest rate that is too low, the remaining principal is not charged interest, which may result in a balloon payment remaining at the end of the mortgage's term.