Help for 'Underwater' Homeowners

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If you're a homeowner on the brink of foreclosure, refinancing your loan at a lower interest rate could be your last chance to keep your home. But for millions of homeowners refinancing may seem impossible because they are "underwater' - the value of their home is now less than their mortgage. Nearly one-in-four people with home loans have this problem, according to First American Core Logic. But the federal government's Home Affordable Program may be
If you're a homeowner on the brink of foreclosure, refinancing your loan at a lower interest rate could be your last chance to keep your home. But for millions of homeowners refinancing may seem impossible because they are "underwater' - the value of their home is now less than their mortgage.

Nearly one-in-four people with home loans have this problem, according to First American Core Logic. But the federal government's Home Affordable Program may be able to help.

Underwater but still employed
The Home Affordable Refinance Program (HARP) lets qualified borrowers refinance a first home mortgage even if the size of that mortgage is as much as 125 percent of a home's value.

The program aims "to provide access to low-cost refinancing for responsible homeowners suffering from falling home prices," according to President Barack Obama. It's designed to lower the interest rate and payments on your home loan. It could also help you replace an adjustable rate mortgage with a more stable fixed rate mortgage.

However, potential borrowers must show that they are employed and will be able to make their payments. There's no minimum credit score to participate though a low score could effect your interest rate. Applicants are immediately disqualified if they have been more than 30 days late on any home loan payments in the past 12 months.

The structure of the current loan also makes a big difference. For example, the loan has to be owned or guaranteed by Fannie Mae or Freddie Mac to benefit from this program. Don't panic - there's a good chance that your banker sold your loan to one of these two mortgage giants after they made the loan to you. Find out here for Fannie Mae or here for Freddie Mac.

Contact your lender or loan servicer to apply for the program - you should find the phone number on your monthly mortgage statement. You should have the numbers on your current income and expenses ready before you call. Here's a list of the documents you'll need.

You may also be able to work with a new mortgage company to refinance a Fannie Mae loan, provided the new lender is capable of making a Fannie Mae Desk Underwriter Refi Plus loan.

Difficulty making your payments
If your loan is bigger than the value of your house and you've already missed or made late payments on that mortgage, you may still qualify for the federal Home Affordable Modification Program (HAMP) available through mortgage lenders.

It's not a refinance program - instead the original mortgage is left in place while the terms of that loans are changed to lower the contract terms.

Once again, you will work with your mortgage company. Your monthly payments may be lowered to a rate you can now afford for as long as five years. Starting in year six, the interest rate on the loan, and the amount of your payments, may begin to increase by up to one percent until the rate reaches "the market rate at the time the modification agreement is prepared," according to the program Web site.

Your lender may also lower your payments by spreading them over a longer period, for example extending a 30-year loan term to 40 years. It could even forgive part of your debt.

Applicants will have to demonstrate financial hardship that puts your mortgage in imminent danger of default - your current monthly mortgage payment must be more than 31 percent of your current gross income and you must demonstrate that you are having difficulty making the payments. Also, you can't live in a mansion - the mortgage must be for an amount less than $729,750. Also, just like HARP, your loan must be owned by Fannie Mae or Freddie Mac.

Call your lender or loan servicer to find out of it is participating in the program - most are. You can find the number to call on your monthly mortgage statement.

Other options
If you don't qualify for either of the governments Home Affordable programs, you may still be able to negotiate a loan modification with your lender. Remember, if the lender seizes your house in a foreclosure, it is unlikely to be able to sell the house for the full value of the home mortgage in an auction.

Ask about the possibility of a short sale, in which you would sell your house at market value even though the price is likely to be less than the amount of the mortgage. In a short sale, the left over loan balance is forgiven. The mortgage company loses money on the deal, but usually not as much money as it would lose in a typical foreclosure and both you and the mortgage company are spared the expense and damage of the foreclosure process.

Someone to Talk You Though It
You probably still have questions, and it might help to talk to an expert. Here is a list of counselors who have been approved by the government who may by able to answer your questions for free.
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