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March of 2010 saw an expansion of the Making Home Affordable Act, the Federal Housing Administration’s refinance program, which will give responsible homeowners the chance to remain in their homes despite financial hardships and duress.
The Treasury Department and HUD, the Department of Housing and Urban Development, created these expansions to allow homeowners a chance to renegotiate their mortgages despite being upside down in their mortgage, a term used to mean owing more on the house than the property is worth. These owners can now qualify for a reduced rate FHA loan.
The loans are available for existing mortgages only. The original lien holder must be willing to write off at least 10% of the principal balance, and the total amounts of the new FHA loan and any other liens against the property may not exceed 115% of the total value of the property. On accepting the reduced payment for the loan, the original lender will consider the payment to pay the loan balance in full.
The homeowner must seek assistance, and will be subject to the following qualifications:
1. The mortgage must be pre-existing; a new home mortgage is not eligible.
2. The homeowner must be “upside down” in their mortgage.
3. The homeowner must have a FICO credit score of at least 500 and be eligible for the mortgage within the underwriting requirements of the FHA.
4. The new FHA-insured mortgage will have no more than 97.75% loan to value ratio.
5. The homeowner must occupy the home as a primary residence.
6. The existing mortgage cannot be an FHA loan.
7. Existing liens and the new mortgage will not have a loan to value ratio of more than 115%.
8. The first mortgage lender must write off 10% or more of the entire principal balance.
9. Mortgages that are considered “refer risk” classification from the Entire Property Finance Loan Scorecard or that are manually underwritten may not incur any greater increase than 31% of the gross monthly earnings of the homeowner. The entire monthly debt load, revolving debt and mortgage, cannot be greater than 50% of the homeowner’s gross monthly earnings.
10. Lenders may not make payments on existing mortgages to bring the mortgage current in order to make the mortgage eligible for the new FHA loan.
11. The original mortgage must not have been brought current by the first lender by any means other than a mortgage loan modification program.
12. The old mortgage and debt obligations may not be paid off by premium pricing in order to qualify the homeowner for a new FHA mortgage.
As part of the Making Home Affordable Act, The Treasury provides incentives to original mortgage lenders who agree to write off part of the outstanding debt on behalf of the homeowner for all liens given after September 7, 2010. The original lien holder must agree to a Service Participation Agreement with the Treasury Department in order to qualify for the incentives, which can include a payment of $500 for each successful lien closure. Part of the Service Participation Agreement will release the borrower from all amounts due on the mortgage considering the balance of the mortgage as paid in full upon accepting the FHA payment as well as a write off of 10% of the principal balance.
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