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Making Home Affordable Programs Offer Help for Homeowners

By Gerri Detweiler for Credit.com

Making Home Affordable is a key program in President Obama’s effort to help homeowners avoid foreclosure. There are two programs offered: the Making Home Affordable Refinancing Program helps homeowners refinance into fixed rate loans, while the Home Affordable Modification Program encourages lenders to modify mortgages so homeowners will have lower monthly payments based on their incomes. When a loan refinance or modification is not feasible, a short sale (where the home is sold for less than the amount owed) is encouraged.

Lenders are not required to participate in either program, but they are offered financial incentives for doing so. Here’s how these programs work:  

Making Home Affordable Refinancing Program

Although mortgage interest rates have continued to stay low by historical standards, there are many homeowners who can’t refinance because the value of their home has declined. Many loan programs today will not allow a homeowner to refinance unless the new loan amount is for 80 – 90 percent of the home’s value.

That’s where the Making Home Affordable refinancing program steps in. It allows homeowners to refinance into 15-year or 30-year fixed-rate loans, as long as the new loan amount does not exceed 125 percent of the home’s value.

Example: Your home is worth $145,000 but you owe $175,000 on your mortgage. You may still be able to refinance under the Making Home Affordable Program. 

You must meet all of the following qualifications in order to be considered for this program:

  • The home you will refinance is your primary residence. Loans on investment properties or second homes are not eligible unless you live in one unit of a two to four unit property.
  • Your mortgage is owned or guaranteed by Fannie Mae or Freddie Mac. Not sure? Contact your loan servicer (the company to which you make your payments) or use online forms for Fannie Mae or Freddie Mac.
  • You haven’t been more than 30 days late on your mortgage in the past year. Only those who have been current for the past twelve months are eligible.
  • Your current mortgage loan does not exceed significantly more than what your home is worth. If the balance on your mortgage is larger than 125 percent of your home’s value, you will not be eligible. (To calculate this amount, simply take your home’s current value and multiply it by 1.25. If your loan amount is larger than that, you will not be eligible.) A second mortgage or home equity loan or line of credit cannot be refinanced under this program. But you may still be able to refinance the first mortgage.
  • You can afford the new loan. You must document that you have enough income to handle the new mortgage.

Home Affordable Modifications

You may not be able to refinance your home if you owe much more than your home is worth, you have a lot of debt, or you are behind on your payments. In those cases, you may want to find out whether you are eligible for loan modification. There are no loan modification fees under this program, and past-due late fees will be waived. Here’s how it works:

If you qualify for a Home Affordable mortgage modification (see details below), your interest rate will be reduced to as low as 2 percent. A lower interest rate means a lower monthly payment, and the goal is to lower your monthly payment to 31 percent of your gross (before-tax) monthly income. Your rate will be fixed for five years, provided you can make your first three monthly payments on time. After five years, your rate starts to rise, but no more than one percentage point each year, until it tops out at the interest rate cap described in your modification agreement. There is a limit on the highest rate you can pay. The interest rate cap will be the market rate for mortgages as published by Freddie Mac when your modification is finalized. That ensures your rate will never be higher than the going mortgage rate at the time of your modification.

If lowering your interest rate to 2 percent does not provide enough relief, your lender may offer you a forty-year loan, which will lower your monthly payment even more. And if that still is not enough, your lender may agree to defer – or even forgive – part of your principal balance or interest. Deferring some of your balance can be risky, though. You could find yourself with a “balloon” payment due in the future if you sell or refinance your home.

You’ll have to meet the following qualifications in order to be considered for a Home Affordable Modification:

  • The home you will refinance is your primary residence. Loans on investment properties or second homes are not eligible unless you live in one unit of a two to four unit property.
  • You owe $729,750 or less for a single family home. (Higher limits apply to two to four unit properties.)
  • You received your loan before January 1, 2009.
  • Your monthly mortgage payment (including taxes, insurance, and home owners association dues) is more than 31 percent of your gross (pre-tax) monthly income.
  • You can no longer afford your mortgage payment, perhaps because of a significant change in your income or expenses.
You can be considered for this program even if you are current on your payments, but you won’t be disqualified just because you have fallen behind.

Second mortgages or home equity loans can’t be modified under this program. However, the servicer of your first mortgage will receive a financial incentive from the government if it persuades the holder of your second mortgage to forgive the second loan.

Another bonus: Pay your loan on time under this program and you will be eligible for a reduction in your principal of up to $5000 over five years. That will help you build equity in your home in case you do need to sell or refinance it in the future.

How to Apply

To apply for either the refinancing or modification program, you should contact your current mortgage lender or loan “servicer” – the company to which you currently make your payments. Be prepared to give your lender the following information:

Income information: You’ll need your most recent paystub and details about other income you receive. Also have your most recent tax return handy.

Debt: You’ll need the most recent statement for any second mortgage or home equity loan you have, as well as your current balance and monthly payments for other debt such as student loans, credit cards, a car loan, etc.

Other Options

What if you can’t refinance or modify your loan? You may still be able to avoid foreclosure. The servicer of your loan may receive financial incentives from the government by allowing a “short sale” (a sale in which your home is sold for less than what you owe, with the lender forgiving the difference) or a “deed in lieu of foreclosure” (also commonly known as “giving the keys to the house back to the lender”). And you, the homeowner, may be eligible for as much as $1500 in relocation expenses in these circumstances.

Again, lenders receive financial incentives for participating, and those have been increased in an effort to get them on board. The government says that lenders representing 75 percent of mortgages are on board with the program. A list of participating lenders can be found at www.FinancialStability.gov. If yours is not listed, it’s still important to talk with your lender to find out if they are working with borrowers under this program.

Last updated in August 2009. The information provided above is for reference only. To report updates or corrections, please send us an email. 		3 Credit Reports, 3 Credit Scores & Premium Credit Monitoring