Following up on my post yesterday about The Housing and Economic Recovery Act of 2008 and what it means for people… today I thought I would talk about the changes in the FHA programs where there is a $300 billion set aside to help homeowners refinance their troubled mortgages into an FHA insured mortgage. This program is also called the Hope for Homeowners Program and was written into the bill by Senate Banking Committee chairman Christopher Dodd (D-CT).
Dodd has been meeting with HUD officials to make sure that HUD will be ready for the program to begin October 1, and according to the Hartford Courant, everyone is confident that the program will be able to begin helping homeowners on (or possibly before) October 1, 2008. For their part, HUD is adding 300 more employees to help FHA handle the additional loan refinancing it expects from the Hope for Homeowners Program — which could be as many as 400,000 families according to estimates.
Who is Eligible?
In order to be eligible to refinance your unaffordable mortgage into an FHA-insured loan, you must meet the following criteria:
- The home must be your primary residence (no investment properties)
- You must have bought the home between January 2005 and June 2007
- You must be spending at least 31% of your gross monthly income on your mortgage payment
- It doesn’t matter if you are behind on your mortgage or not, you must prove that you will not be able to keep paying the existing mortgage without help and you will have to attest that you are not defaulting on purpose just to obtain lower payments
- You will have to retire any 2nd mortgages on the home or any other line of credit on the home — and you will not be able to take out another home equity loan for at least 5 years except for certain circumstances and even then, you will need approval from the FHA
How Does the Process Work?
You can contact any FHA approved lender for help with the application process (Hint, contact us or you can see a list of other FHA approved lenders here).
As part of the application process, you will get a new appraisal on your home to determine it’s current value.
The program is a voluntary program, so your current lender will have to agree to participate. It is currently somewhat unclear on exactly how this “participating lender approval process” will work (getting approval from your current lender), so look for more information about that coming later.
If participating, your current lender will write down the value of your current loan to 90% of your homes current value according to the appraisal. In Maricopa county, where prices have fallen by more than 20%, this will mean a substantial amount of money will be written off by the lender.
If the original lender agrees to the writedown, the new lender then underwrites the loan (don’t forget the eligibility criteria above that must be met), makes a new FHA-insured loan and “short pays” the payoff according to 90% of the appraised value.
Lastly, your old lender is required to pay FHA an up-front premium of 3% of the mortgage principal — which means that not only is your old lender going to have to write off a loss, but also pay FHA a fee to get you a new loan!
Are There Any “Strings Attached” For Homeowners?
Yes.
Your new FHA-insured loan will have the normal closing costs and Up-Front-Mortgage-Insurance (UFMIP) and you will also pay a 3% “exit fee” of the mortgage balance to FHA when you sell your home or refinance the loan.
You will also agree to share any profits from future appreciation with FHA. If you sell your home or refinance within 5 years, you will share the price appreciation with FHA accordingly:
Years 0-1 — 100% of the appreciation is paid to FHA
Years 1-2 — 90% of the appreciation is paid to FHA
Years 2-3 — 80% of the appreciation is paid to FHA
Years 3-4 — 70% of the appreciation is paid to FHA
Years 4-5 — 60% of the appreciation is paid to FHA
Years 5+ — 50% of the appreciation is paid to FHA
Is It Worth It?
It depends.
Each situation is different, so it is important to talk to a mortgage professional and understand what you are committing to. The main factors to consider are:
The terms of your current loan (if you are in an Option ARM, this may help you more than if you are in a 30 year fixed rate loan already)
The current value of your loan vs. how much you currently owe
How long you plan on being in your home
My guess is that for many people in Maricopa county who have seen the seen the value of their home go down by 20% (or more) and are currently in an adjustable rate, it will make sense.
But be sure to do your homework first!
{ 4 comments… read them below or add one }
Hi I have a couple of question. What will happen to my second mortgage? I have a 80% and a 20% to avoid PMI from the same company, will those 2 loans be combined into the 90% new value?
Also, for the amount the government is taking back, if I refin after a few years I understand they will take about 90% profit if any, but will they take after the refinance into a new company?
Thank you
@Sean — Great questions. To answer your questions:
1.) Are the first and second loans combined into the 90% new value? You would have to talk with your lender who owns both mortgages. In order to participate in the H4H program, there cannot be any subordinate liens so most likely your second would be forgiven if your lender agrees to participate or they would combine the two. We have seen it handled on a case by case basis.
2.) It is my understanding that the “appreciation sharing” with FHA for the first 5 years doesn’t depend on who your lender is — so if you refinance, then you would still be on the hook for any appreciation sharing with FHA — however I reserved the right to be wrong (always) because the guidelines are not crystal clear on this as far as I could find.
Best of luck —
Justin
Justin
Great info for us. Thank you. Couple of questions:
If I bought my house in May of 2004 and am techincally not qualified under the guidelines listed above, are there any programs similar to the Hope for Homeowners Program that cover me?
Also, how would I “retire” my 20% loan. Not sure about what that means or how i would do that.
Thanks
Gavin
Gavin,
Thanks for stopping by!
The Hope for Homeowners program falls into the “not-so-real” category in my world — there are more than just a few problems with it… not the least of which is that we haven’t been able to locate an investor who is willing to buy the loans.
Here is a post of some of the “real” and “not so real” refinance options for people today:
http://www.arizonamortgageteam.com/arizona-fha-mortgagerefinance-options-which-ones-are-real/
That said — most people who are in your situation are either doing an FHA short refinance or a loan modification. My personal recommendation would be to try a loan modification first, but the truth is you have probably about as much chance of successfully getting a “mortgage that you can afford” with either one.
Since I originally wrote this post, I have written quite a few more about the current state of “what lenders are doing” regarding short refinances and loan modifications — and of course if you want even more opinion/information/recommendations on your situation, you can always call me.
Last part of your question of “how do you retire your 20% loan” — this is usually done by getting the current lender who holds your 20% loan to write it off… which is something that I have only personally heard of happening when the same lender holds the first and the 2nd loan — but in today’s world, anything is possible.
Justin