Borrowers who can't afford their mortgage payment may want to take a look at the Home Affordable Modification program, which is part of the Obama administration's Making Home Affordable plan.
The Home Affordable Modification program creates a uniform process for loan servicers to modify existing mortgages for homeowners who meet the following two conditions:
They spend more than 31 percent of their income on monthly housing costs.
They already are delinquent or in imminent danger of default because of a major change in their financial situation.
The rules are complicated. The federal government has issued top-level guidelines, but Fannie Mae and Freddie Mac have their own specific guidelines. In addition, lenders, loan servicers and mortgage insurers may have their own requirements as well.
The program was introduced primarily for mortgages owned or secured by Fannie Mae and Freddie Mac; however, other mortgages may also qualify.
Borrowers are advised to call their loan servicer to discuss their situation. Many of these servicers are overwhelmed with customer inquiries, so you'll need to be patient.
Borrower requirements:
The borrower must have missed a mortgage payment or be at risk of imminent default because of a significant increase in the payment or other household expenses, a significant reduction in income or another type of hardship that makes the payment unaffordable.
Borrowers whose mortgage is in foreclosure are eligible. Foreclosure will be stayed on loans owned or secured by Fannie Mae or Freddie Mac during the loan-modification process.
Borrowers who are in bankruptcy may be eligible.
Borrowers must document their income and expenses and provide evidence of hardship or a major adverse change in their financial situation.
Fannie Mae and Freddie Mac require a credit report, but no minimum or maximum credit score.
The borrower must sign a loan-modification agreement, hardship letter and other documents.
Property requirements:
The property must be a detached home, duplex, triplex or four-unit residential property. Fannie Mae and Freddie Mac guidelines allow condominiums, cooperatives and manufactured housing units.
The owner must occupy the property. Fannie Mae and Freddie Mac require documented evidence of owner occupancy. Second/vacation homes, rental properties and vacant homes are not eligible.
The property is subject to a value test to determine if the loan modification makes sense for the investor. A borrower who has a lot of equity in his home or whose income is very low relative to the home's value may not pass this test.
Existing mortgage:
The borrower's monthly mortgage payment, property taxes, homeowners insurance and homeowner association dues must be more than 31 percent of the borrower's monthly income before income tax.
The unpaid loan balance must be equal to or less than $729,720 if the property is a detached house or condominium. Freddie Mac has published the following higher limits for multiple-unit properties: two units, $934,200; three units, $1,129,259; and four units, $1,403,400.
The loan must have originated before Jan. 1, 2009.
Modified mortgage:
The borrower's housing costs will be reduced to 31 percent of his or her income in four steps:
The interest rate could be cut as low as 2 percent.
The loan term could be extended to as long as 40 years.
A portion of the loan balance could be deferred.
The loan balance could be reduced, unless the loan is owned or secured by Fannie Mae or Freddie Mac.
If a portion of the loan balance is deferred, no interest will be charged on that amount. A balloon payment will be due when the borrower pays off or refinances the loan or sells the home.
Unpaid interest, property taxes, insurance premiums and other costs paid by the lender on the borrower's behalf may be added to the loan balance.
Unpaid late fees must be waived.
The borrower must complete a trial period of three or four months before the loan modification becomes permanent.
The interest rate on the borrower's new loan will be fixed for five years. After that, the rate can increase up to 1 percent annually, subject to a cap of the market interest rate on the day the loan was modified.
Negative amortization is prohibited.
If the borrower has a second loan, the lender may modify or eliminate that loan as part of the first-loan modification process through the Making Home Affordable Second Lien Program.
An escrow account for property taxes and insurance is required.
Borrowers will not be charged any fees or costs for the loan modification.
Borrowers may be offered the Hope for Homeowners program as an alternative. This program reduces the borrower's loan balance so he or she will be able to refinance with a new loan guaranteed by the Federal Housing Administration, or FHA.
Borrowers who make payments after loan modification will receive "success incentives" paid by the U.S. Treasury. These incentives accrue monthly and are paid annually. The payments will be applied to the loan balance and could total as much as $5,000 over a five-year period.
The 30-year fixed-rate mortgage rose slightly this week.
The average 30-year fixed-rate increased 3 basis points, to 5.24 percent. A basis point is one-hundredth of a percentage point.
This week's average 15-year fixed-rate -- a popular option for refinancing -- dipped 2 basis points, to 4.74 percent.
The average jumbo 30-year fixed plunged 19 basis points to 6.37 percent. The jumbo rate now has fallen 31 basis points over the past two weeks and is at its lowest level since December 2006.
Adjustable-rate mortgages split this week. The one-year adjustable-rate mortgage fell 6 basis points to 4.94 percent. The popular 5/1 ARM jumped 15 basis points to 4.96 percent.
(Distributed by Scripps Howard News Service. Reach Marcie Geffner at editors(at)bankrate.com)
REAL ESTATE WATCHMust credit bankrate.com
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