The word qualify is my word. As the lender I need to make sure that I can “qualify” the borrower for the loan and ultimately the home that she wants.

The word afford is the customer’s word and is often ignored in the lending office. This is the process whereby the potential borrower determines what she is able to pay each month based on her income and other bills and lifestyle habits.

Let me give you an example of the conflict:

A couple recently applied for a mortgage and said they could afford a payment of $1750 per month. She was employed full time making around $39,000 per year her husband was between jobs. He had been off for 6 months and had three prior job changes in the past two years including one complete career change 15 months ago. His salary in his most recent position was around $60,000. The job he is looking at currently will pay a smaller base salary and a commission based on his production.

Because they have no other debt and a nice emergency fund, they feel comfortable paying up to $1750 per month for a house payment. They feel that her income is stable and that his income will be at least as much as hers and likely over $50,000. I like folks who are confident in their ability to earn money. That however, does not get them approved.

Right now I can only qualify them for a payment around $1200 – this is calculated on her base salary alone. After he has been employed for at least 30 full days (and because of his recent 6 month hiatus, maybe a little longer), I will be able to add his base salary to the mix increasing their qualifying payment to something higher than $1500 and closer to their high-end “afford” number.

I recently read an article on-line that commented on a recent survey of loan officers who were willing to make general comments about their customer’s mortgage decisions. The survey highlight was that most (7 out of 10) loan officers nationwide were of the opinion that their customers accepted mortgage payments in excess of what they could afford.

Though that number seems high to me, I did recently have one of those cases; it’s not something that I get a lot. The client learned about me through this website, and we began discussing his needs and financial situation. He ended up in a deal that would not only require most of the cash he had saved, but the house would still need a lot of work after closing.

As soon as I see a transaction hit a level where I’m getting nervous, I call my customer and tell them. They generally appreciate it, and when I brought it up in this case, I was reminded that he would be getting married this summer and that his fiancé had some cash to contribute to the repairs. We went through the likely reality of the next year together—the wedding, honeymoon, home repairs, car purchase, and anything else we could think of—and found out that it all worked. It was closer to the line than the customer thought but better than I had suspected. We both appreciated the conversation and moved forward.

The point here is that this entire last conversation happened AFTER the lender had already given the all-clear on the mortgage approval.

So, a lender saying yes does not equal your being able to afford the loan. Your loan officer should help you see all the angles of the situation, but if he doesn’t, take a few minutes and add it up yourself. My next four posts over the next couple of weeks will help.

Not everyone will qualify, but for those who do—and the government’s hoping that 3 to 4 million do—$75 billion has been set aside to fund the program (and to provide banks a monetary incentive, good news for the borrower).

Here are some frequently asked questions to help you navigate this…

1. What is a loan modification?

This is a change in one or more of the terms of a home loan. Generally speaking, it allows the reinstatement of the loan and provides lower monthly payments. You may also hear it referred to as a mortgage modification, restructuring, or workout plan. Under Obama’s plan, the goal is to help the borrower reduce monthly payments to 31% of monthly income or lower.

2. How do I qualify?

The short answer is that you’ll need to show that modification will make the difference between your keeping the home and losing it. So you’ll need to prove financial hardship—loss of income and/or increase in expenses due to job loss or relocation, divorce or separation, death of spouse or other, illness, or even military service; and you’ll need to prove responsibility–proof of income, and a complete and accurate disclosure of your financial statement.

3. What are the restrictions?

Here are a few: Only those living in the home on which the loan is being paid are eligible. Mortgages on second homes, investment properties, commercial properties, and vacation homes are ineligible. The mortgage must have originated prior to 2009 and be no more than $729,750.

4. What is the procedure?

The bank will look at your monthly income and monthly loan payment. Under the MHA, borrowers can lower their payments to less than 31% of income. One or more of the loan’s terms may be adjusted to meet this. The new mortgage payment will then be in effect for five years.

5. Do I have to be currently delinquent on my payments to get a loan modification?

Not necessarily. One of the goals of the program is to help borrowers before they get into trouble. To that end there’s a provision and incentive which allows lenders to reach out to those homeowners who are not yet delinquent but deemed at risk.

6. Will a loan modification help me stop foreclosure?

Yes, it will. And that’s the program’s main goal. You’ll work with your lender to find a payment solution that halts the foreclosure and/or reinstates the loan.

7. Can my missed payments be added back into my new loan modification?

Yes. Arrears can be rolled into the new loan balance, making it current.

8. Can I do a loan modification myself or should I pay someone to represent me?

Before the MHA program came along the burden of getting a loan modified was largely on the borrower’s shoulders. But incentives for the lenders to get involved are making that less so. Still, it’s not a simple process. For what it’s worth, the Treasury Department is discouraging third-party, fee-based representatives. But the decision is yours. Either way, learn the process (you’re starting that now), think like a bank when putting together your materials, and know your legal rights.

9. How long will the MHA program be available?

Through the end of 2012.

10. So how do I get started?

Be informed, learn all you can, then contact your lender’s loss-mitigation department.