The federal government plans to spend $75 billion to pull millions of homeowners back from the brink of foreclosure.
The Making Home Affordable plan has two parts aimed directly at consumers:
- Refinancing help for up to 5 million homeowners who are current but struggling with their loans.
- Modifications for as many as 4 million homeowners who’ve fallen behind on payments or are on the brink of doing so.
The Mortgage Bankers Association said Thursday that a record 11.2% of loans on one- to four-unit residences were at least one payment past due or in the foreclosure process in 2008.
Who’s left out? Investors and speculators. Those with jumbo mortgages. Those who can’t document their incomes. Those who owe so much more than their houses are worth that a lender would do better by foreclosing.
The refinancing plan
If you’ve got a loan that’s well above current market rates, an interest-only loan or one that’s about to reset at a much higher rate, the Making Home Affordable refinance plan may get you into a fixed, market-rate loan. It won’t lower the principal (and may not even lower the payments if you’ve just been paying interest, for example), but it will eliminate the risk that your payment will suddenly skyrocket. This program ends in June 2010.
Borrowers may have their loans modified only once, and the program applies only to loans made before Jan. 1, 2009. Loans on single-family properties worth more than $729,750 are excluded. Borrowers are responsible for paying lender fees, points and other closing costs.
To find out if you’re eligible for the refinancing program, start by answering these four questions:
- Is the mortgage for your primary residence? You’ve got to live all or most of the year in the home for which you’re getting a refinance or modification.
- Are you current on your loan? That means you haven’t been more than 30 days late making a payment in the last 12 months.
- Is your mortgage owned or guaranteed by Freddie Mac or Fannie Mae? Here’s how to find out:
- Locate your loan number. You’ll find it on the mortgage statement or payment coupon book.
- Call your loan servicer, the bank or company that collects your mortgage payments.
- Phone Fannie Mae (1-800-7FANNIE begin_of_the_skype_highlighting 1-800-7FANNIE end_of_the_skype_highlighting, between 8 a.m. and 8 p.m. ET) or use the Fannie Mae online questionnaire to learn if Fannie holds your loan.
- Or call Freddie Mac (1-800-FREDDIE begin_of_the_skype_highlighting 1-800-FREDDIE end_of_the_skype_highlighting, between 8 a.m. and 8 p.m. ET) or use the Freddie Mac online questionnaire.
- Is the amount you owe on the mortgage roughly the same as your home’s value? Specifically, you won’t qualify if you owe less than 80% of your home’s currently appraised value or more than 105%, including refinancing costs. This percentage is your “loan-to-value ratio.” Find it by dividing your loan amount by the home’s value. For example: Your home’s worth $200,000 and you owe $210,000. Divide $210,000 by $200,000 to get a loan-to-value ratio of 105%.
You can also use the government’s site, Making Home Affordable, to learn more and assess your eligibility.
Borrowers who are seriously “underwater” — those who owe more than 105% of the home’s worth — won’t qualify for refinancing. In that case, see if you qualify for a government-sponsored mortgage modification. If you haven’t had a formal appraisal recently, you can’t know the value of your home for certain until you apply for the refinancing and the bank values the property. But you can get a rough estimate by asking a real-estate agent for an opinion. It won’t be a number you can “take to the bank,” though.
If your answer to any of these questions was “no,” read Page 2 to find out if you qualify for a mortgage modification.
If you answered “yes” to all four questions, the next step is to demonstrate that you can afford the payments of your refinanced loan.
You’ll need to pull together these papers to prove your income and expenses:
- Pay stubs. You’ll need to show the gross (before tax) monthly income of everybody whose name will be on the loan. You can do this with each borrower’s two most recent pay stubs. Or, if you don’t receive payroll checks, you’ll be asked to prove your income from other sources.
- Income taxes. You’ll need to show a copy of your latest income tax return.
- Other mortgages or lines of credit. For any other mortgages or loans attached to the home, produce the monthly statement or other documentation with the loan number, contact information for the loan servicer and the names on the loan. If your home has more than one mortgage (or HELOC or credit line), you’ll need that paperwork, too.
- Credit cards. You’ll be asked to produce statements with the account balance and minimum monthly payments due for each of your credit cards.
- Other loans. You also need to provide the latest statements for any other loans or revolving credit. That includes student loans, vehicle loans, department store credit accounts and bank or finance company loans.
And your mortgage payment history must be able to pass scrutiny by the lender.
Finally, call your mortgage holder and get ready to wait. Lenders are just ramping up to accept applications, and they’re sure to get a lot of calls. Government planners caution, “Lenders and servicers are just getting the detailed program requirements and it may take time before they are ready to accept applications.”
The mortgage modification plan
Mortgage modifications are available for borrowers who owe much more than their homes are worth, whether they’re still current on their monthly payments, in arrears or well into the foreclosure process. They must, however, prove they are able to make the monthly payments that the lender proposes.
Many homeowners need lower payments but haven’t qualified for modification programs because they owe too much money. While a refinance is an entirely new loan, a modification keeps the old loan but changes its provisions to make the loan more affordable. While most mortgages would qualify for modification, not just those owned by Freddie Mac and Fannie Mae, lenders are not compelled to participate. (As contracts are signed, a list of participating servicers will be made available on the Internet at FinancialStability.gov).
Modifications under the new government plan can drop the cost of your monthly payments by lowering your interest rate (for up to five years) or spreading your loan over 30 or 40 years. The lender can also lower the balance of the loan, but that’s not required.
Borrowers may have their loans modified only once, and the program applies only to loans made before Jan. 1, 2009. The program ends in 2012.
Answer these questions to see if you’re eligible:
- Is this home your primary residence? Your home could be a single-family house, condominium or cooperative, a one- to four-unit property or a manufactured home that’s attached to a foundation. Investment properties, second homes and vacant or condemned properties won’t qualify. You’ll need to show it’s your residence by producing a tax return, credit report, utility bill or some other proof.
- Do you owe $729,750 or less on your first mortgage? That’s the qualifying limit for a single-family home. The plan’s explicit about not helping “millionaire homes.” If you own a building with up to four units and live in one of them, the limits are $934,200 for a two-unit building, $1,129,250 for three units and $1,403,400 for four units.
- Is your monthly mortgage payment more than 31% of your gross (before tax) income? If it’s less than 31%, you’re not eligible. To calculate your housing debt-to-income ratio, divide your monthly mortgage payment by your (pre-tax) income. Example: You earn $4,000 a month before taxes are taken out and your monthly mortgage payment is $1,500; your ratio is 37.5%.
- Is your total debt — including your mortgage plus everything else, car payments, credit card bills and all the rest — more than 55% of your gross income? If it is, you may be eligible, but you’ll have to get consumer debt counseling. Example: You earn $4,000 a month before taxes; in addition to your monthly mortgage payment of $1,500, you have a $265 car payment and two credit cards with minimum monthly payments of $216 and $300 ($2,281). That makes your total debt-to-income ratio 57%, meaning you’ll need to accept counseling to get a modification.
- Can you demonstrate a financial hardship? You’ll be asked to:
- Show proof of all your sources of income, including two paycheck stubs or other proof of income.
- Produce a copy of your most recent tax return.
- Sign a request for a transcript of your tax return, the IRS form 4506-T (here’s a .pdf version of the form).
- Sign an affidavit of financial hardship. (The plan’s form isn’t available online, but here’s one example of a financial hardship .pdf form, from the state of Minnesota.)
Note: If you’ve already missed even one mortgage payment, don’t wait. Immediately contact your mortgage lender or call 1-888-995-HOPE begin_of_the_skype_highlighting 1-888-995-HOPE end_of_the_skype_highlighting (4673) to reach a HUD-approved housing counselor.
How the modification works
If you’re spending more than 38% of your monthly income on housing, the government plan offers your lender incentives to reduce your monthly mortgage payments so that housing debt consumes no more than 31% of your income. It’s up to the lender how that’s done.
The lender can decide to reduce your mortgage balance. But it’s more likely the lender will use another means to lower your payments, like lowering your interest rate or extending the life of the loan to give you smaller payments over more years.
There are incentives to lenders to write down the interest rate to as low as 2% if that brings your payment down to 31% of your gross monthly income. If your interest rate is lowered, the new rate is good for five years. After that, it can rise each year (though by no more than 1% a year) until it reaches the market rate on the day the loan was modified.
Lastly, a portion of the debt could be forgiven. This is optional on the part of the lender. There is no requirement for principal forgiveness.
If you do qualify, the government will pay your servicer up to $1,500 as an incentive to modify your loan. If your loan is modified, the government will also pay to reduce your mortgage balance, up to $1,000 a year for five years.
The government acknowledges that “the plan will not help everyone.” If you can’t qualify, the plan includes incentives for lenders to make it easier for homeowners to sell their houses for less than the mortgage is worth (a short sale) or to get out of the mortgage by transferring the deed to the lender (deed in lieu of foreclosure). To get help with these options, use this map to find a HUD-approved counselor or call 1-800-569-4287 begin_of_the_skype_highlighting 1-800-569-4287 end_of_the_skype_highlighting.