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Written by Jim Harrelson

If you've recently applied for a loan modification under the Home Affordable Modification Program (HAMP) act, you may be quite surprised to learn that the approval rate for loan modification is very low; some statistics show around 10% to 12%. While the program was purported to be available to over 4 Million home owners in need of debt relief from their overbearing mortgages, this program has reached only a small percent of home owners. The HAMP program was designed to alleviate the debt pressures on families who have experienced financial hardship, but the results just aren't making the mark.

According to the US government, you may be able to qualify for a HAMP loan modification if you meet all of the following criteria:

1.You occupy the house as your primary residence.

2.You obtained your mortgage on or before January 1, 2009.

3.You have a mortgage payment that is more than 31 percent of your monthly gross (pre-tax) income.

4.You owe up to $729,750 on your home.

5.You have a financial hardship and are either delinquent or in danger of falling behind.

6.You have sufficient, documented income to support the modified payment.

7.You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

Many homeowners who clearly pass the above criteria get rejected from the program by their bank with a cryptic and what appears to be an intentionally confusing reason: that your loan doesn't pass the NET PRESENT VALUE TEST. You're given a rejection document with about 50 points explaining criteria used to determine the mortgage net present value calculated by the bank, but NOTHING about what it means and how it is calculated. So what exactly IS this secret formula for net present value and what can you do to understand it?

In a nutshell, the net present value test is used to determine the financial benefit to the bank of the two choices the bank has when you can't pay your mortgage: (a) foreclosure, and (b) loan modification. The Net Present Value test essentially weighs the two options side by side, and if the bank will make more money by modifying your loan, you qualify! This program has nothing to do with helping you stay in your home - they banks don't care about how this affects you personally. All they care about is making more money.

So what can you do to tip the scales in your favor? Understand what the net present value is and how to manipulate the formula in your favor. In order to do this, you need to know what the formula is, or at least understand the various factors that affect the calculation. Unfortunately, the banks will never tell you the exact formula used, although by law they must advise of the criteria specific to you that they used in their calculation. However, with a little clever math and a net present value spreadsheet, you can back your way into the formula which will help you know how to manipulate the outcome.

The federal government publishes a NPV reference calculation, then the banks modify this to suit their needs. So you probably won't ever get the calculation exactly right, but understanding the inputs to the formula can help you impact the outcome of the calculation. Factors in the calculation:

• The current value of your house - determines what they can sell the house for if they foreclose
• An estimated "carrying cost" for the bank - how long the house would stay on the market, cost of foreclosure, etc. This will vary regionally.
• How many payments (if any) you are behind - how much they've already lost
• Estimate of what percent of modified loans will go into foreclosure anyway - to calculate how much they lose from lowering your monthly payment but STILL have to foreclose. Again this will vary regionally, and the bank might even give you a higher risk assessment if you aren't very clear about your intentions to keep the house!
• Based on your available monthly income, how much you can pay monthly on the mortgage - they take your monthly wages, subtract out any other debt payments such as car loans, credit card minimum payments, taxes and insurance, and establish what you can afford which is 31% of the final number

Finally, adding this all up, they come up with two numbers:

1.The value to the bank of modifying your loan based on what you can afford (according to them)

2.The value to the bank of foreclosing on your home and reselling it at auction

If the value of #1 is higher than #2 - congratulations - you get a trial modification. Otherwise, you get a rejection. So if you got rejected, how can you tip the scales in your favor? Look closely at point #6 above - you have to show that 31% of your documented income is HIGH enough to make a payment that makes modifying the loan more profitable for the bank than foreclosing. So you don't want your income TOO LOW to qualify.

Figure out a way to show more monthly income, or if self-employed, challenge the income they calculated for you. For the self-employed, manipulating your documented income seems to have the most flexibility in achieving loan modification.

Remember they're subtracting out your other monthly debts from your monthly salary/income. So clearing one credit card payment by consolidating to your lowest interest card may help you show more monthly income. If you're a two-car family with two auto loans, consider selling one and getting a beater-car for cash to get back and forth to work. Remember it's ALL about how much you have available MONTHLY, and getting rid of a $300 car payment will significantly impact your monthly cash available to improve your calculation.

Learn more about how to calculate your loan net present value at http://www.net-present-value.us/. Download our simple spreadsheet and figure out how you can manipulate the calculation in your favor.