Making Home Affordable:

As of March 22nd, 2011, “The Making Home Affordable Program is part of the Obama Administration’s broad, comprehensive strategy to get the economy and the housing market back on track. The Making Home Affordable Program offers strong options for homeowners: (1) refinancing mortgage loans through the Home Affordable Refinance Program (HARP), (2) modifying first and second mortgage loans through the Home Affordable Modification Program (HAMP) and the Second Lien Modification Program (2MP), (3) providing temporary assistance to unemployed homeowners through the Home Affordable Unemployment Program (UP), and (4) offering other alternatives to foreclosure through the Home Affordable Foreclosure Alternatives Program (HAFA).

The Loan-to-value (LTV) ratio:

A percentage calculated by dividing the first loan amount by the Market Value (Appraised value) of the home.

The combined loan-to-value (CLTV) ratio:

A percentage calculated by dividing the total loan amounts by the Market Value (Appraised value) of the home.

Front-end debt-to-income ratio (Front-End DTI):

Represents current mortgage payment (including principal, interest, property taxes, homeowners insurance & any homeowners dues) divided by gross household income. If this figure is less than 31%, then the homeowner is not eligible for The Making Home Affordable.

Back-end debt-to-income ratio (Back-End DTI):

Represents the total monthly expenses divided by the gross household income. If this figure is higher than 55%, then the homeowner may be required to attend Consumer Credit Counseling.

Imminent Default / Reasonably foreseeable:

Applies to homeowners who are not yet delinquent on their mortgage payments. Every potentially eligible borrower who calls or writes in to their servicer in reference to a modification must be screened for hardship. This screen must ascertain whether the borrower has had a change in circumstances that causes financial hardship, or is facing a recent or imminent increase in the payment that is likely to create a financial hardship (payment shock). If the borrower reports a material change in circumstances, the servicer must ask about current income and assets, and current expenses as well as the specific circumstances relating to the claimed financial hardship. Each of these elements shall be verified through documentation. If the servicer determines that a non-defaulted borrower facing a financial hardship is in Imminent Default and will be unable to make his or her mortgage payment in the immediate future, the servicer must apply the NPV Test.

Cash Flow:

Difference between total debt and expenses and net monthly income

Payment at 38%:

This is the first threshold for a loan modification, the lender is responsible for any costs incurred to reach this payment level

Payment at 31%:

The target Principal & Interest payment ratio as determined by the Treasury Department. Lenders will be subsidized for a portion of their losses incurred by revised loan terms to reach this target payment. The federal government “shares” in the cost to modify the loan. Calculation equals 31% of gross monthly income, less monthly amounts for property taxes, insurance & any HOA dues.

30 year payment rate:

The first “waterfall” method used to reach the 31% target is to lower the rate to as low as 2%

40 year payment rate:

The second “waterfall” method used to reach the 31% target payment-if needed, extend the loan term to 40 years.

Balance Reduction:

May be either deferred or forgiven, the final method available to reach the target payment. This is the last resort, and not very common.


The repayment of a loan (typically a mortgage) through regular payments. Payments are determined by the duration of the loan, the remaining capital and interest rates.

Interest Only:

A loan from the structure where you pay only the interest for the life of the loan and pay the capital only after a given period.

Principal Balance Reduction:

a type of loan modification from your lender, which reduced the balance to reduce your monthly payments. Lenders usually grant that the people in areas heavily impaired, or when the amount of depreciation is always lower than the cost of foreclosure of your home.


the original amount that you borrow with an obligation to repay the amount over a set term.


the length of time (generally in months) to repay the principle.

Standard modification waterfall:

As of 1/12/2011, according to the Making Home Affordable,the servicer applies the standard modification waterfall to reduce monthly mortgage payment to 31% of gross (pre-tax) income. Here are the 4 steps that the servicer uses in calculating the target modified payment.

  • Step 1: Capitalize outstanding interest, escrow advances, out-of-pocket servicing expenses (no late fees).
  • Step 2: Cut interest rate to as low as 2%.
  • Step 3: Extend loan terms to 40 years.
  • Step 4: Defer portion of principal, interest-free, until loan is paid off.

Interest Only ARM:

An Interest Only ARM only requires monthly interest payments. Since you are not paying any principal, as you are with the other two types of mortgages described above, this can lower your monthly payment. However, since your mortgage’s principal balance is not decreased, you will have a balloon payment at the end of the mortgage’s term. Like a Fully Amortizing ARM, an Interest Only ARM will often have a period where the interest rate is fixed, and then it is adjusted annually. An Interest Only ARM will also have a maximum interest rate that it will not exceed. This calculator uses a maximum interest rate of 12%.

Mortgage amount:

Expected balance for your mortgage.

Term in years:

The number of years over which you will repay this mortgage. The most common mortgage terms are 15 years and 30 years. Please note that for the Interest Only ARM you will have a balloon payment for the entire principal balance at the end of the loan term.

Expected rate change:

The annual adjustment you expect in your ARM. The range for this calculator is minus 3% to plus 3%. Use a negative value if you believe interest rates will decrease, a positive value if you believe they will increase.

Interest rate:

Annual interest rate for each mortgage type. Typically an ARM will have a lower interest rate than a fixed rate mortgage. The rate of an Interest Only ARM will vary by lender.

Months rate fixed:

This is the number of months the rate is fixed for an ARM. During this period the interest rate and the monthly payment will remain fixed. The rate will then adjust annually by the expected rate change.

Interest rate cap:

This is the maximum interest rate for this mortgage. The mortgage’s interest rate will never exceed the interest rate cap.

Monthly payment:

Monthly principal and interest payment (PI) for the Fixed Rate Mortgage and the Fully Amortizing ARM. This is an interest only payment for an Interest Only ARM.

HAMP Eligibility Qualification Terms:

Click here to learn more about HAMP eligibility or visit the Making Home Affordable Site.


a Hardship Affidavit means that the borrower is unable to continue making full mortgage payments and describes one or more of the following types of hardship:

  • A reduction in or loss of income that was supporting the mortgage;
  • A change in household financial circumstances;
  • A recent or upcoming increase in the monthly mortgage payment;
  • An increase in other expenses;
  • A lack of sufficient cash reserves to maintain payment on the mortgage and cover basic living expenses at the same time. Cash reserves include assets such as cash, savings, money market funds, marketable stocks or bonds excluding retirement accounts and assets that serve as an emergency fund. Reserves are generally considered to be equal to three times the borrower’s monthly debt payments.
  • Excessive monthly debt payments and overextension with creditors, e.g., the borrower was required to use credit cards, a home equity loan, or other credit to make the mortgage payment;
  • Other reasons for hardship detailed by the borrower.
  • Divorce
    or separation
  • Death of spouse/co-borrower/family member
  • Illness
  • Military service.