Mortgage 411 Center

It’s official:  effective April 1, 2009 the maximum loan to value ratio (LTV) on all cash-out refinances to be insured by FHA may not exceed 85% of the home’s value.  Currently the maximum LTV is 95%.  What does this mean in plain English?  Quite simply if you are a homeowner who does not have a lot of equity in your home and you also do not have cash to pay other debts in order to qualify for the mortgage AND you would like to refinance to take advantage of the lower interest rates , you are running out of options.

Why is this important?

• In today’s declining real estate market there are many people who either bought while prices were high, put little or no money down, or both and currently do not have a lot of equity in their homes.  Changing the loan to value ratio from 95% to 85% is going to severely limit the number of people who are able to refinance.  To put it in terms of numbers, say you own a home worth $220,000.  Currently you would be able to refinance as long as the new loan amount doesn’t exceed $209,000 ,  under the new rules that changes  to $187,000.  Even if the value of your home has not declined, if you bought it with only a 5% downpayment you would not be able to refinance with an FHA cash-out loan since you would not meet the new LTV requirements.

• Cash-out does not necessarily mean that the borrower is getting a check  (cash) at closing.  It simply means that more than the balance of the mortgage and closing costs are included in the new loan amount.  While you may not think that you need to or may not want to do a cash-out refinance, you may have to do a cash-out refinance if you have other liens against the property which need to be paid or you have other outstanding loans, credit card bills etc which will need to be paid in order to qualify for the loan.

• FHA loans have less strict credit standards than conventional loans, and the terms are generally more favorable.  This new rule is going to hurt those who probably could use the help the most.

Please note, you may have also heard about the President’s new mortgage plan that will allow homeowners to refinance up to 105% of the value of your home.   This may be an option for homeowners with little to no equity BUT this option does not allow for cash-out at all no matter what the loan-to-value.   What I am seeing is that many people who are unable to afford their mortgage payment also have other debts that they have incurred which is making it difficult for them to qualify for a new loan.  Since this program prohibits cash-outs which could otherwise be used to pay down the debts, the pool of borrowers who can qualify for this program is limited.

Bottom line.  If you are thinking about refinancing to lower your mortgage payment and have been putting it off and know that you do not have perfect credit, 20% equity in your home, or have other outstanding bills that need to be paid you better act now!

Many homeowners today are finding themselves in a situation where they can no longer afford to pay their mortgage.  Perhaps they lost their job or because of the economy their income has been greatly reduced.  Perhaps they had an adjustable rate mortgage and could no longer afford to make the payments once their interest rate increased.  Or perhaps they simply bought more home than they could have been realistically able to afford.   If you are a homeowner in this situation, where should you turn? 

The  Homeowner Affordability and Stability Plan

The government’s new plan, which was unveiled last week, is supposed to help 7-9 million homeowners stay in their homes.  However, many, including supporters of the President , have criticized the plan, stating that it is not designed to help home owners who need it the most.  Their are two components to the plan - the refinance portion and the loan modification portion.  The refinance portion is only available for homeowners who owe up to 5% more than their home is currently worth , have a loan guaranteed by Fannie Mae or Freddy Mac , and are not currently behind or their mortgage.    The modification portion is available to homeowners who are behind on their mortgage, regardless of whether the loan is guaranteed Fannie or Freddie.  Please note, that while the government is offering incentives for lenders to participate in this program, it is completely voluntary.  Furthermore, it is anticipated that there is going to be a backlog at most lenders, as homeowners are rushing to try to take advantage of the program, so if you are in danger of losing your home, you may not get immediately relief.  This program is also only available to borrowers with conventional mortgages, therefore it will not help the many homeowners with FHA or VA loans.

Refinance your Loan

If you do not owe more than your home is currently worth and are not behind on your payments but are still feeling the pinch, it is possible to refinance you loan, either through your current lender or a different lender.   Please note that not all lenders offer the same types of loan products so it is possible that you may be turned down by one lender yet approved for a loan with another.  Ideally you want to shop with a lender that has access to a full range of products, including government sponsored loans like FHA.  

Loan Modifications

There are many companies out there that are offering loan modifications.  Many charge a hefty fee and promise results that they are not able to attain.   Yet there are also  companies out there that are legitimate and can help you save your home.   The problem is that it is difficult to ascertain the good from the bad. 

There are also those who are of the opinion that homeowners should contact the lender and attempt to get a loan modification themselves.  However, unless you are able to get a hold of the correct department or speak to the right person you may not get very far.  Besides, most banks are not staffed to handle the current flow of customers who are seeking loan modifications, if you search the interent you will read countless accounts of files being lost, agreed upon terms being changed, and general frustration with the overall process.

I’m Still Confused.  Which is the Right Option for Me?

Please note, the options listed above were made assuming that you wish to stay in your current home.  However, you may wish to sell and in that case you should contact a Realtor, preferrably one with experience in shortsales in the event that you owe more than your home is currently worth.  Other options include deed in lieu of foreclosure (basically giving the home back to the bank - contact your lender).  This option will have a negative effect or your credit although it is not looked at as bad as a foreclosure. 

If you can no longer afford to pay your mortgage, your best bet as a first step is to contact your current lender and try to work something out with them.  They will best be able to tell you if you are able to take advantage of any of the three options listed above, either the govenment’s new plan, a loan modification, or a loan refinance.   If you current lender is unable or unwillling to help, or perhaps is just too busy to be able to help you, then the next step is to contact us.  As mentioned before, not all lenders offer the same types of loan programs,  therefore it pays to get a second opinon.  You may still be able to refinance you loan, even if your current lender turns you down.  If you do not qualify to refinance, we can refer you to legitimate companies that can help you modify your loan, so that your payments are more affordable.

If you have any questions on how you can make your mortgage loan more affordable and keep your home,  feel free to contact us.

It’s the New Year again and that means lots of promises and plans to change for the better. If you are like most Americans you are probably telling yourself that now that 2009 has arrived you will either: lose a few pounds, get back into shape, take up a new hobby, get organized, take control of your finances, or some other resolution that will probably become abandoned before Valentine’s Day. This year, why not start the New Year off right and cross one of these items off the list right now? If you have resolved to take control of your finances, then refinancing your mortgage loan may be in order, and there has never been a better time to do so then now. (If you don’t yet own a home and would like to make homeownership a goal for 2009, stay tuned. I’ll be covering that next.)

Why refinance your mortgage in the New Year? The reasons are many:

1) Mortgage interest rates are at an all time low and lower rates mean lower payments.

2) If you still have an Adjustable Rate Mortgage (ARM) you can refinance and enjoy a low fixed rate.

3) If you have equity in your home you can get cash out to use for other purposes.

4) Mortgage guidelines are tightening so you may not qualify for a loan progam when you finally do decide to refinance.

5) No one knows if home prices will continue to decline and waiting to refinance may mean losing equity and not being able to qualify in the future as well.

Visit www.aboveallmortgage.com to learn more about the loan process and to apply online. Then with that out of the way, you’ll have the rest of 2009 to work on achieving you other goals. Happy New Year!

Written by Michelle Chamberlain, Above All Financial Services

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