Everyone is buzzing about the Homeowner Affordability and Stability Plan. There is a lot of information and what it is and how it works. There is even more chatter about how the plan will work in actual application and if it will address the problems it is intended to rectify. This short article will provide a few facts about what the plan is and who it will help.
WHO IS IT FOR?
A. The program is designed to help homeowners—over the next three years only—that have adjustable rate mortgages move into fixed rate mortgages without prepayment penalties. This also means that if your mortgage payment is currently based on a low adjustable rate, then a fixed rate loan could very well increase your monthly payment amount significantly.
B. You must have a mortgage that is held or securitized by Fannie Mae or Freddie Mac, and it MUST be “conforming,” meaning it is less than $417,000 for most areas of the United States, and $625,500 for what are called “high cost” areas.
C. Your house can’t be worth too much less than the amount you owe. According to the Treasury Department: “Eligible loans will now include those where the new first mortgage (including costs of refinancing) will not exceed 105% of the current market value of the property.” So… if your house appraises for $300,000, and you owe more than $315,000, you don’t qualify to participate in the program.
D. This program will not reduce the amount you owe on your mortgage, in fact because of refinancing costs you’ll probably end up owing a few thousand dollars more.
E. This program applies to primary residences only, although multiple-unit homes with up to four units may qualify for the program, assuming you live in one of the units as your primary residence, and lenders are required to verify that this is the case before the modification is finalized.
F. This program may require you or your lender to purchase some form of mortgage insurance, thereby increasing the monthly/annual costs.
WHAT IF YOU’RE BEHIND ON YOUR PAYMENTS?
If you’re behind on your primary residence’s mortgage payments you may qualify for a payment reduction if your monthly mortgage payment is more than 31% of your monthly pre-tax income.
WHAT IF YOU’RE CURRENT ON YOUR MONTHLY PAYMENTS?
If you’re current on your monthly payments, you don’t qualify for a principal reduction, but borrowers that remain current throughout the time it takes to process their loan modification will receive a $1500 “incentive payment,” for having done so. These borrowers also receive an annual bonus of $1,000 for the first five years, assuming payments are made as agreed.
DO ALL LENDERS HAVE TO PARTICIPATE?
No, it is a voluntary program, but mortgage lenders that do participate are supposed to lower interest rates so a borrower’s monthly payment does not exceed 38% of pretax monthly income. Once a lender agrees to that, then the U.S. Treasury Department will contribute taxpayer dollars to bring the payments down to 31% of income, but that interest rate will only last for five years, after which time Treasury has only said that the “mortgage payment will adjust upward at a moderate, phased-in level.”
WHAT IT DOESN’T DO:
A. You DO NOT qualify for this program if your mortgage payment is less than 31% of your pretax monthly income, and/or you owe quite a bit more than the house is worth today. But, if you’re behind on payments or can prove that your default is imminent, you may qualify by checking with your lender this coming April.
B. If your mortgage payment is greater than 31%, but you’re behind on your payments, your lender may choose to lower interest rates or even the amount owed, but they are NOT legally obligated to do either.
If you decide to wait until April, and are told that you do in fact qualify for the program, you’ll need to provide your lender with recent pay stubs that show your household pretax monthly gross income and documentation of any income you receive from other sources, if applicable, your most recent income tax return, information about any second or third mortgages, the payment amounts for each of your open credit card accounts, and payment information on any other outstanding loans including student or car loans.
