Refinancing for Underwater Homes: New HUD Program Pitches In
Many underwater homeowners-those who owe more on their home than it is currently worth-feel stuck. They can't sell without taking a major loss, and they often can't refinance because the appraiser's report doesn't past muster. If they want to take advantage of some mortgage modification programs, they're often told they need to be behind in their mortgage first.
But what if they are current on their mortgage? Well, the government has a new plan for these homeowners.
Under a new U.S. Department of Housing and Urban Development (HUD) program, homeowners who are current on their loans can reduce their hefty loan-to-value mortgage debt by 10 percent, if they qualify and if their lender approves. This is big news, especially for homeowners in the five hardest-hit states--Nevada, Arizona, Florida, Michigan and California-where between 35 percent and 70 percent of existing homes have underwater mortgages.
"Negative equity is a significant drag on both the housing market and on economic growth," said Mark Fleming, chief economist with First American CoreLogic. "It is driving foreclosures and decreasing mobility for millions of homeowners." Negative equity and near-negative equity mortgages account for nearly 29 percent of all U.S. residential properties with a mortgage.
First American CoreLogic reported in February that more than 11.3 million of residential mortgages held negative equity in their homes at the end of 2009, up from 10.7 million in third quarter. An additional 2.3 million homes were approaching near-negative equity. "Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property values, owners begin to default," according to the CoreLogic report.
As many as 4 million homeowners could get help by 2012 from expanded FHA programs, with the federal government funding the program for up to $50 billion through the Troubled Asset Relief Program or TARP.
But Jay Dacey, a mortgage planner in Plymouth, Minn., cautions homeowners before they jump into these government-initiated programs. "The programs the government has tried to instill to date have completely failed," he says. "I believe if you do one of these it might adversely affect your credit because it will show that you settled for less. I would tell the consumer to make sure they understand the credit consequences in advance." So do your homework, he cautions.
* The total mortgage amount for the borrower after refinancing cannot be greater than 115 percent of the current value of the home. After all, the goal is to lower a mortgage to be closer to today's actual value.
* The homeowner must occupy the home as their primary residence.
* The homeowners must qualify for a new FHA loan under standard FHA borrower guidelines.
* The homeowners must have a FICO credit score of at least 500-which is a lower than getting a traditional mortgage.
* The existing loan cannot be FHA-insured. That's because FHA guidelines doesn't allow its own loans to be reduced.
* The lender must agree to write down the principal loan balance a minimum of 10 percent and the final loan amount cannot exceed 115 percent of the current value of the home (including any second mortgages).
* The refinanced FHA loan cannot be greater than 97.75 percent of the value of the home. This means if you may have to bring money to the closing table to lower it further. If you don't have cash on hand, you can get the second loan to cover the difference.
This is relief for those who might not otherwise be approved by the Home Affordable Modification Program (HAMP). Under HAMP, more than 1.4 million homeowners received offers for trial modifications and more than 1.1 million borrowers were receiving a median savings of $500 each month as of the end of April. Permanent modifications have been granted to more than 230,000 homeowners, and an additional 108,000 permanent modifications have been approved by servicers and are pending borrower acceptance. But still that is not enough, given the CoreLogic numbers.
"Housing is a long-term investment, and homeowners should just focus on making the next payment," says mortgage planner Dacey. "Don't worry about the market value. You will still owe money next month."