How to use Hope for Homeowners
Hope for Homeowners is Washington's latest attempt to deal with the mortgage crisis.
Lawmakers claim it will help 400,000 homeowners avoid foreclosure by refinancing adjustable-rate mortgages with soaring payments into fixed-rate loans that are within their budgets.
The program began Oct. 1, and you can qualify if:
The home you want to refinance is your primary residence. Hope for Homeowners is not for investment property or second homes.
You took out your current loan on or before Jan. 1, 2008.
You can't afford your current mortgage payments. The program will use one of the Federal Housing Administration's standard measures of affordability: Mortgage payments shouldn't require more than 31% of a borrower's pretax income. Applicants will have to prove that their adjustable-rate mortgages were gobbling up 31% of their gross pay as of March 1, 2008.
It doesn't matter if:
You're behind on your payments. You can still apply.
Your home has declined in value and you have no equity. Equity is the difference between what your home is worth and how much you owe on your mortgage. Most lenders require borrowers to have 80% or even 75% equity before they'll approve refinancing. But you can even be upside-down on your current mortgage, which means you owe more than your home is worth, and you can still apply through Hope for Homeowners.
That's because it will allow you to take part in the FHA's well-known program that helps borrowers qualify for mortgages by promising to repay the loan if they default.
Hope for Homeowners loosens the requirements for obtaining an FHA loan. It allows you to obtain a government-insured, 30-year, fixed-rate loan for up to 90% of your home's current assessed value or $550,000, whichever is less.
Because you're a bigger risk than most FHA borrowers, you'll have to pay higher mortgage insurance premiums.
Borrowers will have to pay 3% of the amount they're borrowing at the time the loan is made and 1.5% of the balance each year.
There are two potential deal-breakers you'll have to overcome during the refinancing process:
- Your current lender must agree to the refinancing. That won't be a problem if the new loan, for 90% of the property's current value, covers the balance on your current loan. If it doesn't, your current lender will have to agree to write off the difference. If that's a few thousand dollars, your lender probably will agree. If the balance is tens of thousands of dollars, your lender will be reluctant to take such a huge loss.
- All second mortgages will have to be paid off. This will be an even bigger complication for anyone who financed their home with a "piggyback loan," or took money out of their home with a home equity line of credit. In most cases, the primary mortgage holder gets paid first; the second mortgage holder gets whatever's left. In many cases, the secondary holder would have to accept even bigger losses than the primary holder.
If you refinance through Hope for Homeowners, you'll instantly have 10% equity in your home because you can refinance no more than 90% of its current value.
But the program goes to great lengths to make sure you don't enjoy a windfall profit from your new loan. Indeed, you'll have to agree to split any appreciation in your home with the federal government.
Here are the restrictions you'll have to accept:
- You can't take out a home equity loan of any kind for at least five years. The only exception is if you need money for essential repairs or maintenance.
- The FHA must approve any home equity loan and your total mortgage debt can't exceed 95% of the home's appraised value at that time.
- You'll be charged an "exit fee," 3% of the outstanding principal, when you sell or refinance out of your Hope for Homeowners loan.
- The FHA gets 100% of the profits if you sell or refinance your home again within the first year.
- The FHA gets between 90% and 60% of the profits if you sell or refinance over the next four years.
- After five years, the FHA gets 50% of the profits when you sell or refinance out of your Hope for Homeowners loan.
You can apply to refinance through Hope for Homeowners at most banks and mortgage companies. Here's where to find FHA-approved lenders in your area.
If you're seriously upside down, you'll need professional help negotiating with your lender. We recommend you start with a member of the National Foundation for Credit Counseling.