If you’re straining to pay your mortgage, you may find help in the fine print of the plan President Obama issued last week to reduce the pace of foreclosures, especially if you live in a region of the country where home prices are highest.
The government estimates that the initiative, called Making Home Affordable Refinance and Modification Options, could help up to 9 million households in danger of losing their houses. Already, nearly 2,900 Americans are in foreclosure every day, according to a congressional oversight panel.
The new plan may help reduce monthly payments if a mortgage is as much as $729,750—nearly 75 percent higher than the $419,900 ceiling of the foreclosure relief plan announced last month. That increase should make a big difference for struggling homeowners living in states like California, Florida and New Jersey, where home values skyrocketed during the housing boom and now have fallen drastically.
“This new $729,000 level will definitely help some people” who would not have been eligible before, said Martin Eichner, director of HUD (Department of Housing and Urban Development) counseling programs for Project Sentinel, a nonprofit housing center in California’s Silicon Valley that helps distressed homeowners.
Two Options: Refinancing or loan modification
The new plan is expected to be most helpful to those who have difficulty making their monthly payments but are not yet so far behind that foreclosure seems imminent. It offers two different programs: The first, a program to refinance mortgages, is available only to those whose mortgages are government-insured. The second, a loan modification plan, is available to homeowners whose mortgages are held by private financial institutions and are not federally insured.
The refinancing plan:This is for homeowners whose mortgages are already guaranteed by Fannie Mae or Freddie Mac, the government-controlled agencies that finance the bulk of new home loans now. Under this program, the government will actually rewrite a mortgage, offering the homeowner a lower-cost, fixed-rate loan to replace a higher-cost, adjustable-rate mortgage.
Refinancing is available only if the balance of the mortgage is no more than 105 percent of the current market value of the property. So, for instance, if you owe a $200,000 balance on a property now estimated to be worth only $190,000, you could still qualify. However, you will not be able to refinance if you are already delinquent on your house payments. The government estimates that 4 million to 5 million homeowners who are currently on time with their payments could qualify for refinancing under the new plan.
Loan modification:If your home loan is not guaranteed by Freddie or Fannie, you could still qualify for a loan modification, even if you are delinquent on your current loan. The government is setting aside $75 billion that will help pay for loan modifications by offering banks and loan servicers financial incentives to rewrite existing mortgages (to adjust the interest rate or the duration of the loans they hold). The government estimates another 3 million to 4 million homeowners could be helped by this program.
You can qualify for a loan modification if you don’t owe more than $729,750 on your first loan. You will have to document your income, show pay stubs and recent tax returns, and sign an affidavit declaring that you suffer from financial hardship. Using a set formula, the mortgage holder will calculate whether it is likely to receive a higher cash return under loan modification than it would if the house went into foreclosure. If the loan modification yields a higher return, the mortgage will be modified.