FHA – to the Rescue?

With the recent Sub Prime Mortgage meltdown, FHA is now the big player nationwide.

FHA loans came into existence in the 1930’s during the Great Depression  in order to allow lower income Americans to borrow money for the purchase of a home. The government program was intended to provide banks with adequate insurance to insure against mortgage defaults that were subsidized by the government.

Unlike Sub Prime lenders in the past the FHA does not allow consumers to buy a house without putting something into the deal. Down payments generally are 3 percent along with additional differences between FHA mortgages and subprime: You can’t just “state” your income and get a loan. You’ve got to show proof to your mortgage originator that you earn what you say. The FHA never has offered “payment option” plans that allow borrowers to send in almost nothing while adding to their debt through negative amortization.

Well, the fall of 2010 should bring us a new refinance program for those with mortgages that are underwater (the mortgage amount exceeds the value of the home). However, the program is voluntary for  mortgage lenders.

The government will offer cash incentives tied to the total value of loan principal reduced. To participate in the program, lenders must write down at least 10 percent of the original loan balance, and the restructured loan amount must be less than the current value of the home.  After the principal write down, the new loan to value can be no higher than 97.75% of the new appraised value.

If you have a second mortgage, the lien holder must agree to subordinate their second mortgage to the new first mortgage, and must agree to write off any principal amount that exceeds 115% of current loan-to-value (LTV).

This option will be made available to homeowners with mortgages that are not currently insured by the FHA. Existing FHA-insured borrowers are not eligible for this program.

Eligibility requirements:

  • You must be current on your existing mortgage(s)
  • You must occupy the home as your primary residence
  • You must qualify under current FHA underwriting requirements (after principal write down)
  • Your FICO score cannot be less than 500
  • Your front-end debt-to-income (DTI) ratio can not exceed 31%, and the back-end DTI ratio can not exceed 50%
  • The existing lender must agree to principal write down
  • The second mortgage lien holder must subordinate to the new first mortgage, and cap the balance at 115% of the value of the home.

Other measures include:

  • Temporary assistance for the unemployed: the government will allow unemployed borrowers to reduce or suspend mortgage payments for 3-6 months
  • Helping Homeowners Move to More Affordable Housing (HAFA): Encourage short sales and deed-in-lieu transactions as an alternative to foreclosures. The government will increase payments to mortgage service companies and second mortgage holders who agree to participate and will double relocation assistance payment for borrowers successfully completing foreclosure alternative to $3,000 from $1500.

Keep in mind the principal reductions will occur over a three-year period and it’s unclear what the impact of these modifications will have on credit scores.

Call it what you want but it seems after the past few years being a free for all for Mortgage Modification’s handed to people so far in default it’s crazy, soon there may be a program to help those  who are actually making their mortgage payments on time… stay in their homes and catch a break.

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