How you can benefit
The president’s $75 billion plan to stem the tide of foreclosures is designed to provide more affordable mortgage terms for up to nine million US home owners.
It is meant to help families that are facing foreclosure, as well as those that are struggling to keep up with their payments even though they “played by the rules,” in President Obama’s words.
People who aren’t specifically targeted for assistance under the plan, called the Homeowner Affordability and Stability Plan, still may benefit. Obama has said that by bolstering the finances of government agencies Fannie Mae and Freddie Mac — and thereby restoring confidence in them — the plan will lower mortgage rates across the board and begin to stabilize home values.
Answers to the most commonly asked questions about the program…
Who is eligible for the plan?
If you owe up to 105% of what your home is worth, you may qualify for low-cost refinancing.
If you spend more than 31% of your gross monthly income on mortgage payments, you may qualify for loan modification.
Prepare for possible refinancing or loan modification by calculating how much equity you have in your home and what your gross monthly income is.
Who will benefit directly from the home owner assistance plan?
The program has two parts. One offers “low-cost” refinancing for mortgage holders who otherwise would not qualify for a new loan because their homes have lost value. The second offers loan modification — which involves altering the loan’s terms, such as its interest rate — for those who are either missing payments or at risk of doing so because their mortgage bill eats up more than 31% of their gross monthly income.
When does the plan kick in?
Home owners began applying for help under the program on March 4. They have until June 2010 to get refinancing and until December 31, 2012, for loan modification.
Are real estate investors eligible for this type of assistance?
Only on a home that is the person’s primary residence. Properties with up to four units (such as an apartment building) may qualify as long as the owner lives in one of the units.
REFINANCING RULES CHANGE
Who is eligible for the refinancing part of the plan, and how does that work?
Essentially, lenders will waive the 80% loan-to-value ratio commonly required for refinancing. Under the plan, you may qualify for refinancing if you owe up to an amount that is 5% higher than what your home is worth. To be eligible, your mortgage must be a conforming loan held by Fannie Mae or Freddie Mac, which means it is capped at $417,000 in most of the US… $729,750 in certain high-cost areas, such as Los Angeles and the New York City area… and somewhat higher than that amount in Alaska, Guam, Hawaii and the US Virgin Islands. (Call your lender to check whether Fannie Mae or Freddie Mac holds your loan.) You also must have a good mortgage payment record (no more than 30 days late on a mortgage payment in the last 12 months), and you must be able to afford the new payments. Under standard rules, monthly payments should not require more than 31% of your gross monthly income.
The plan promises “low-cost” refinancing. Does that ensure savings?
The new rate will reflect market rates at the time you refinance. You have to be smart about this, as if you were refinancing on your own. For example, if you currently have an adjustable-rate mortgage (ARM), refinancing into a fixed-rate mortgage actually may cause your payments to rise at first. But the refinancing may save you a great deal of money over the life of the loan, assuming that you stay in your home, and will eliminate the uncertainty that comes with an adjustable interest rate. The refinanced loan must be a 15- or 30-year fixed-rate mortgage.
It generally is worth refinancing if…
TREASURY HELPS MODIFY LOANS
How does a loan modification under the plan work, and who is eligible?
Your lender brings your mortgage payments down to 38% of your gross monthly income before taxes, and then the US Treasury assists in reducing the ratio further by matching additional cuts in payments until the ratio is down to 31%, even if that means reducing the interest rate on the loan to as low as 2%. You are eligible if you currently spend more than 31% on your mortgage and your unpaid principal balance is $729,750 or less for a one-unit home. But if your total debt-to-income ratio is 55% or more (including credit card debt and car loans), you must sign up for credit counseling certified by the Department of Housing and Urban Development (HUD) before qualifying for loan modification.
Borrowers do not have to pay any loan modification fees. Lenders will pick up the costs of reviewing loans. When needed, the loan may be stretched out to as long as 40 years or lenders may accept principal payments without interest.
How long does the modified interest rate stay in effect?
After five years, the lender may adjust rates upward “gradually” by up to 1% per year until they reach the average rate for a conforming loan at the time of the modification.
Why would lenders agree to offer a loan modification?
Mortgage servicers, which manage the loan and loan modification, can get an up-front payment of $1,000 for each eligible loan modification, plus up to $1,000 additional per year for up to three years if the borrower stays current on his/her loan payments.
Also, to provide incentive to find borrowers at risk of (but not yet) failing, servicers who unearth at-risk borrowers who could benefit from a loan modification can get a $500 bounty from the government, while the actual mortgage owner can get a $1,500 payment, all for changing the loan terms to better fit the borrower’s needs before the borrower falls behind.
Do borrowers get any additional benefits?
Borrowers who get modified loans and stay current can get a $1,000-per- year reduction in the loan’s outstanding balance for up to five years.
THOSE WHO DON’T QUALIFY HAVE OTHER OPTIONS
What if I can make my payments without difficulty, but my home is worth a lot less than what I owe on the mortgage?
Unless you need to sell your home fast or obtain a home-equity loan, there’s nothing inherently dangerous about owing more than your home is worth. If you have an affordable fixed-rate mortgage, wait out the cycle — perhaps making some improvements to maximize your home’s value should you decide to sell in the next upturn.
Can I get a loan modification if I don’t qualify for the Obama plan?
Possibly. Call your lender, preferably before you fall behind on payments, and say that you’re struggling. The loss-mitigation department may work with you — its job is to protect the bank’s investors, and a foreclosure may hurt the lender and its investors more than a loan modification.
What about refinancing if I don’t qualify under the plan?
If your home’s value has fallen by 25% or more, you could be “upside down” or “underwater” on your mortgage, which means that you have lost the equity in your home. That makes it very unlikely that you can refinance. Otherwise, check with a mortgage broker to see whether you qualify.
If you are thinking about refinancing, either by the standard route or with the help of the plan, you need to determine how much equity you have in your home, how much of your gross monthly income goes toward your mortgage and how much goes to pay off other debts, such as student loans, car financing and credit cards. These are the ratios that mortgage lenders deem most important and the criteria that the Obama plan uses to determine who can get aid.
What if I bought a home that I really can’t afford anymore, and I can’t get relief through a loan modification or refinancing? What options remain?
Talk to your lender before deciding that foreclosure is your best option. Other options include deed-in-lieu (of foreclosure), which is a kind of voluntary foreclosure process… or possibly a “short-sale,” where the home is sold for present market value and the borrower isn’t responsible for the difference between what is owed on the mortgage and the sale price.