President Obamaâ€™s Making Home Affordable plan, announced Wednesday, aims to help up to 9 million homeowners afford their homes in the wake of the current economic crisis. An allied program, called the Home Affordable Refinance can help another 5 million with relatively steady mortgages, but declining home values. If both plans succeed, they will not only keep people in their homesâ€”they can also curb foreclosures and cushion their impact on community and national scales.
But beyond all the hype around these plans, many of us are still in the dark about who really benefits. Who gets what? How do you know if youâ€™re eligible? Hereâ€™s a rundown of the qualifications laid out in the programs.
The refinancing plan is offered to Fannie Mae or Freddie Mac loans on properties occupied by the homeowner. The first mortgage cannot exceed 105% of the current value of your home. That means for a $300,000 home, your total debt cannot go over $315,000. You can still refinance a second mortgage provided the first one meets the 105% requirement.
Cash out options will not be available during the refinance, so they canâ€™t be used to pay off other debts. Applications will be accepted until June 2010.
Borrowers may no longer have to be behind on the mortgage to qualify for a loan modification if they fall within the guidelines. Although priority will be given to delinquent borrowers, the main requirement is debt-to-income ratio (DTI) of 31%. This means that your total monthly dues (including insurance, taxes, and association dues) must exceed 31% of your income, which qualifies you as being in hardship. The loan modification option applies to mortgages originated on or before January 1st.
Your home must also be your primary residence. That means it canâ€™t be owned by an investor or used as a secondary home. The plan also puts a price cap on loans for single-family homes: those valued over $759,750 will not be eligible.
How it works
The program is voluntary, so we canâ€™t be sure which lenders will participate, and when. But the government is bent on having most, if not all, of the major lenders take part. Several incentives have been put in place to make loan modification a more attractive option than foreclosure.
Basically, government has offered to split the modification costs with the banks, thereby reducing losses for both parties. Lenders must first agree to cut mortgage payments to meet a 38% DTI, then the government will pay part of the cost to bring it down to a more comfortable 31%.
Servicers also get cash incentives for granting loan modifications. Each modification will earn them $1,000, as well as a $1,000 yearly payout for three years as long as the homeowner stays current. As a borrower, you also get up to $1,000 off your principal every year for five years as an incentive for staying on track. The incentive program starts three months after the new loan terms take effect.
When should you sign up?
The simple answer is now, while thereâ€™s still something in it for you. Even if lenders donâ€™t participate, or if you donâ€™t meet the requirements for state-subsidized modifications, it may still be worth a try. Qualifications aside, most lenders would be more willing to work out better loan terms than seize your home. This is because they lose as much in a foreclosure as you do, so except in rare cases, it usually makes more sense for them to modify your loan than to foreclose.
This is also true for loans owned by other investors who appear to be owned by servicers. If youâ€™re currently in a specific contract with an investor, the guidelines may not directly apply to youâ€”but that doesnâ€™t mean loan modification isnâ€™t an option. Again, if loan modification makes more financial sense, lenders would be more than willing to meet you halfway.
What you need
Since most borrower information will already be filed with lenders and servicers, paperwork shouldnâ€™t be much of a problem. With these new guidelines, the process should be a lot smoother than last year, when thousands of homeowners were scrambling to get loan modification deals.
Lenders will need to see your latest tax return and at least two pay stubs to prove that you can handle the reworked costs. As with traditional loan modification, a hardship letter (in this case called the â€œaffidavit of financial hardshipâ€�) is also required and will be verified by proper authorities.
Homeowners in bankruptcy
Bankruptcy and active mortgage litigations shouldnâ€™t keep most borrowers from qualifying for the program. Filing for Chapter 13 bankruptcy may allow you to get a principal reduction of your mortgage in court, as long as you can prove youâ€™ve tried other options beforehand. If youâ€™re currently in litigation over your mortgage, you can get it modified without losing your legal rights.
Getting the best results
Working with a third-party law firm can greatly increase your chances of getting your loan modified. As loan modification requests pour in, lenders will be overloaded, and homeowners may be declined even for the most straightforward applications. A loan modification attorney can help you tailor your request to suit the requirements of your particular lender for a higher probability for success. They can also help you explore other options, such as bankruptcy and short sales, or better strategies for settling a loan modification with the best results.