Unemployed and underwater borrowers to get more government help
Borrowers whose homes are underwater will be able to get help in two ways. If you're making on-time payments you may be eligible for a refinance with an FHA loan. If you're 60-days delinquent or more, you'll need to apply for help through the Home Affordable Modification Program (HAMP).
If you're looking for a loan modification because you're at least 60 days delinquent, this program adds a new option of principal reduction under HAMP, so your lender must consider that in addition to interest rate reduction if they are in the program. You can search the Making Homes Affordable Web site to see if your lender is participating. Right now of the major lenders only Chase is not considering principal reductions. Bank of America just announced its new program for some of its loans.
If you're up to date on your mortgage, but your loan is underwater, the refinance will be done through an FHA guaranteed loan. To apply for an FHA guaranteed loan and also qualify for a principal reduction, you will need to meet all the regular guidelines of an FHA mortgage application and your mortgage debt will need to be more than 115% of the current market value. The big advantage of this new program is that your principal could be written down so you're total mortgage debt equals no more than 115% of the home's market value. After a principal reduction, your total mortgage debt payment cannot exceed 31% of your income to be eligible for the program.
Unemployed homeowners will be able to get a temporary reduction in mortgage loan payments for at least three months and possibly as long as six months. The extension for an additional three months will be determined on a case-by-case basis after consultation with the regulator, your loan servicer and the investor.
During the initial three-month period the payment will be set at 31% of income based on your unemployment check. In some cases borrowers will be allowed to skip payments. To qualify for this payment reduction you will need to be receiving unemployment checks and will have to prove that fact. You will also need to meet all of the other eligibility requirements of a HAMP modification: live in home as your principal residence, have a mortgage balance of less than $729,750, owe mortgage payments that are not affordable (greater than 31% of your income) and demonstrate a financial hardship (that's usually not hard to do when unemployed).
Administration officials said experts believe that if a borrower's home has a loan-to-value ratio higher than 115% then they are more likely to walk away from the home and not sustain payments. So banks will be encouraged with incentives to consider principal reductions when the home exceeds 115% of the current market value.
First liens will be written down based on 100% of an appraisal, but not below 100% of the property value. If the write down for the first lien holder is less than 115%, then the second lien holders will need to write down loans to 115% of loan to value. They will be given incentives by the government to do that. Whether or not a loan will be written down is still up to your lender, servicer and investor. So you're not guaranteed to get this deal.
But ultimately total mortgage debt for both unemployed and underwater borrowers cannot exceed 31% of your income. In some cases people just won't be able to afford the loan even after a principal reduction and/or interest rate reduction because they own more than they can afford. In those cases, alternatives for short sales and deed-in-lieu of foreclosure will be available with incentives for the borrower, lender and servicer.
Whether you are unemployed or not, if you are seeking a loan modification because your mortgage loan is underwater, lenders will need to consider both a principal reduction and a reduction in interest rate. Prior to this change lenders were not required to test options of principal reductions with a loan modification.
The new programs will be funded with about $50 billion of TARP funds and will not require any new allocation of taxpayer money. About $14 billion of that will be used to improve incentives to pay off of subordinate lien holders to make it easier for first lien holders to come up with a plan that will help get borrowers into a loan modification they can afford. Administration officials estimated that subordinate lien holders would get 10 to 20 cents on the dollar with a maximum of $6,000. If the home were to go into foreclosure, subordinate lien holders are likely to lose everything when a home is underwater.
Like other announcements for changes to HAMP, don't expect anyone to be ready to answer questions immediately at your bank. But, don't hesitate to call a HUD counselor to get help right away.
Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Personal Bankruptcy" and "The 250 Questions You Should Ask to Avoid Foreclosure."