If you are having problems meeting your current mortgage payments or if you know anybody in such a situation, this new legislation may offer a solution.

At the end of July, a $300 billion housing rescue bill was signed into law aimed at helping homeowners avoid foreclosure. Now, thousands of borrowers who are unable to meet their mortgage payments will be able to refinance their existing loans into new low-cost fixed-rate ones insured by the Federal Housing Administration (FHA).

It is estimated that 400,000 borrowers with $68 billion in loans could benefit from this program - but the bill allows for up to 2 million borrowers to participate.

Who will be eligible?In order to qualify, you must be an owner-occupier and your loan must have been taken out between January 2005 and June 2007. You must also be able to show that you are spending at least 40% of your gross monthly income on all household debt.

You may be up to date on your existing mortgage or you may be in default, but either way you have to show that you can’t afford to keep paying your mortgage and that you are not intentionally defaulting just to get lower payments.

Before you can get an FHA-backed mortgage, you must first clear any other debts on the home, such as a home equity loan or a line of credit.
You will need approval from the FHA, and total debt cannot exceed 95% of the home’s appraised value at the time.

How do you apply?

You should initially contact your current mortgage servicer or alternatively, you can go directly to an FHA-approved lender for help. There is a list of lenders on the Department of Housing and Urban Development web site (http://www.hud.gov/ll/code/llslcrit.cfm).

How does the refinancing process work?Note that this is a voluntary program and the lender holding the original mortgage has to agree to rework a given loan before things can get started. They will have to agree to make substantial concessions, writing down the value of the loan to 90% of the home’s current value. In areas where prices have plummeted by as much as 20%, that will mean  the lender writing off a significant amount.

So it is likely that lenders won’t sign off on such a workout unless they think that they’ll lose less money that way, than they would by foreclosing.

Each loan will be underwritten by an FHA lender on a case-by-case basis, so the banks will have a new appraisal to determine the home’s current value, as well as verifying up to date income statements, bank accounts etc. in the same way as a normal mortgage application.
The new lender then buys the old loan and takes over the reworked mortgage.

The old lender has to write off any fees and penalties on the original mortgage, and accept the proceeds from the new loan on a paid-in-full basis. It also pays the FHA an up-front premium equal to 3% of the mortgage principal.

Your new FHA loan will have an interest rate that is fixed for the life of the loan, as opposed to an adjustable-rate mortgage that can be have rates that are totally unpredictable.

What does it cost you?There should be little up-front cost for you. Loan origination fees, for example, could probably be paid back over the life of the loan. There are some other costs to take into consideration though. This is not a simple bail-out deal.

You will not be allowed to take out another home equity loan for at least five years, unless it’s to pay for needed repairs or maintenance on the home.

You will also have to pay an insurance premium to the FHA which is equal to 1.5% of the principal, every year. This is a mortgage guarantee policy.

Shared Equity

The FHA also gets to share in any profits you make.  The way that works is that when you resell your home, or refinance it, you pay back 3% of the mortgage principal to the FHA.

And that’s not all! In the event that you sell or refinance within a year, you have to pay the FHA 100% of any profits you make as a result of an increased home price. Of course if the home does not increase in value, that won’t be an issue.

After a year though, you still have to share any profits with the FHA but the amount reduces on a sliding scale - 90% in year two, 80% in year 3 etc. until it reaches 50% where it will remain until whenever you sell or refinance.

Will it work for you?

It really depends on your individual circumstances and you are strongly advised to consult with your CPA or other financial advisor. For many, savings will be substantial, although you do need to remember that the FHA will be sharing any profit you make on the home down the line. Nevertheless, this is a much better scenario than losing your home through foreclosure.

If you are having financial difficulty in meeting your loan payments but you don’t feel that this will work for you, if you have no, or little, equity in your home, you may want to consider a short sale. In this case, the lender forgives the outstanding loan and you get to walk away from your home without any further financial liability to them. In this case, you need to list your home for sale before a foreclosure becomes inevitable and here, I may be able to help you. For more information, please contact me, Bernard Gibbons, at any time, on (925) 997-1585.