Obama Plan Broadens Options for At-Risk Homeowners.
“Through this plan, we will help between seven and nine million families restructure or refinance their mortgages so they can avoid foreclosure.” — President Barack Obama
President Obama’s Homeowner Affordability and Stability Plan has set aside $75 billion in assistance to help homeowners cut their mortgage payments. The federal funds are essentially a set of incentives designed to encourage lenders to lower monthly home loan bills. Participating banks are being given the freedom to modify loans in ways that would have been impossible just a few months ago. For eligible homeowners the plan can be generous and forgiving.
How Much Does It Cost to Get a Loan Modified?
There are no fees for loan modifications under the Obama program.
Who is Eligible for a Loan Modification?
The Obama Plan is designed to help homeowners undergoing “serious hardship.” Serious hardship could include a job loss or skyrocketing payments on an existing adjustable rate mortgage (ARM). You do not have to be behind on your payments to qualify.
Most importantly, your loan must be backed by Fannie Mae or Freddie Mac. It also has to fall below the conforming loan limit set by those entities, which is $417,000 in most parts of the country, but as high as $729,750 in some high-price regions. There are higher limits for owner-occupied properties with two to four units.
For your lender to agree to a modification, there must be a good chance you’ll keep making your payments under the new terms. If so, a loan modification is better for you and your lender than a foreclosure. On the other hand, if you have no income, no job or are hopelessly overextended, you’re unlikely to get help under the Obama plan. For homeowners in this scenario, there are state plans and other assistance. Many servicers offer forbearance today, a temporary suspension of mortgage payments while borrowers get back on their feet.
If you owe more than your house is worth, what many call “underwater” or “upside-down,” you may still qualify. As of July 1, the plan allows borrowers to owe 125% of a home’s value. Qualifying is not automatic. Homeowners report unexpected snags with providers of Private Mortgage Insurance.
What Are the Income Requirements?
To make an initial assessment of whether or not you’ll qualify for a loan modification, start by adding up your housing payments. Include your mortgage bill, property taxes, homeowner and flood insurance as well as condominium and homeowner association fees. If that combined payment is more than 31 percent of your gross monthly income, you may qualify for a loan modification. The Obama plan encourages lenders to renegotiate the original loan and use federal incentives to get the borrower’s payment down to 31 percent of his or her monthly gross income.
To qualify for a loan modification, you may have to provide proof of income.
The Obama Homeowner Affordability and Stability Plan also reaches out to homeowners with heavy consumer debt. If your payments for mortgage, credit cards, student or auto loans add up to more than 55 percent of your income, you’re still eligible as long as you agree to debt counseling. The goal of the program is making homes affordable.
How Are Loans Being Modified?
Some lenders are authorized to cut their interest rates to as low as two percent on some mortgages to get monthly payments into an affordable range for distressed borrowers. The interest rate reduction will stay in place for five years, then gradually increase to a rate most likely in the five to six percent range.
The program also includes an additional incentive for lenders to modify existing loans: $10 billion to protect them from losses due to falling home values in severely distressed areas. This protective measure is designed to backstop borrowers who might default again on newly modified loans.
If the payment is still too much, lenders can extend the term of the loan to as many as 40 years.
What about Second Mortgages and HELOCs?
Mortgage servicers who take part in the loan modification plan for second mortgages, must modify the second mortgage when the first mortgage is redone. The government will share in the cost. Lenders will get a preliminary payment of $500, with $250 a year for three years. Borrowers who keep up their payments on the modified loan will get $250 a year for up to five years credited to their first mortgages. In addition, borrowers who make payments on time may be able to get the principal amounts of their loans lowered by $1,000 a year for five years. If the second mortgage is forgiven, mortgage holders will get $1,000 to release the borrower from obligations on these loans.
If I Fit the Guidelines, Am I Guaranteed a Loan Modification?
No two loans are alike, so there’s no guarantee that you will succeed in getting your loan modified. Most of the guidelines of the Obama plan are clear, but every mortgage is a unique agreement between an individual lender and borrower.
Short Sales Now Backed
The Obama Affordability Plan now offers mortgage lenders incentives up to $1000 if they allow borrowers to sell their homes at a loss. Lenders can also get the $1000 for accepting a deed-in-lieu of foreclosure, which releases the borrower from all future obligations on the loan in exchange for the deed. Second mortgage holders will also get $1000 to release the home owner from obligations on these loans.
While major banks have agreed to participate in the Homeowner Affordability and Stability Plan, lenders still have considerable leeway when it comes to making decisions about the terms of your loan. Get in touch with your lender or mortgage servicer to find out how you can benefit under the Obama program for homeowners.