The Senate on Saturday passed a $300 billion housing rescue bill aimed at helping troubled homeowners avoid foreclosure.
President Bush is likely to sign the bill into law within days. After the law kicks in on Oct. 1, thousands of at-risk borrowers will be able to refinance their unaffordable old mortgages into new low-cost fixed-rate loans insured by the Federal Housing Administration (FHA).
The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from the program - but the bill allows for as many as 1 million or 2 million borrowers to participate in the program.
Here's what homeowners need to know.
Who's eligible?
"Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 31% of their gross monthly income on mortgage debt to be eligible for the program."
What does this mean to you? If your loan was originated prior to 2005, or after June 30, 2007, you cannot participate, and the program is useless to you. Also, if your mortgage payment is less than 31% of your gross monthly income before taxes, you are not elegible.
"They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments."
What does this mean to you? Be prepared to fill out reams of papers, and be prepared to produce records documenting every dime you have spent over the past two years. Every dollar you spent since you got your mortgage will be scrutinized. Did you spend $27.95 (with tip) for dinner at Applebee's seven months ago? Be ready to write a justification.
"Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it's to pay for necessary upkeep on the home."
What does this mean to you? If you have a home equity line of credit (HELOC) you must pay it off... every penny of it... If your HELOC balance is $15,000, get out your check book and stroke a check for $15,000 to the bank to pay off the loan, then close the account. Wait a minute... if you have $15,000 cash floating around your checking account, how can you be in financial distress???
"To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home's appraised value at the time."
What does this mean to you? When your home gains value such that you have equity you wish to harvest with a HELOC, be prepared to submit another wheelbarrow load of papers to FHA, then wait a long time for a reply. FHA won't be loaning you the HELOC, so be prepared to apply to your bank for your HELOC when FHA gives you approval.
How can you apply?
"Borrowers can contact their current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the Web site of the Department of Housing and Urban Development."
How does the refinancing process work?
"This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home's current value. In areas where prices have plummeted by as much as 20%, that will mean a substantial loss for the lender."
"But lenders won't sign off on a workout unless they think that they'll lose less money on that than they would by allowing a home to go through the costly foreclosure process."
What does this mean to you? Your current mortgage company has the right, privilage, and option to say "NO!!!". Your mortgage company does not have to participate, meaning you are stuck with your current mortgage. The vast majority of lenders prefer foreclosure over a work-out plan. If your mortgage company says "No", you're stuck. FHA cannot and will not "force" any lender to participate in this program.
"Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home's market value."
What does this mean to you? If your mortgage holder is among the small hand-ful of banks who participate in work-outs, FHA will tell your note holder how much the bank will have to "eat". The bank may not wish to eat that much of a loss, so they can say "No" and you're stuck.
"If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage.
As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3% of the mortgage principal."
What does this mean to you? It means that your current mortgage company not only eats the loss, they also pay FHA a 3% fee.
What does it cost?
"There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate."
There Are Strings
"However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually.
Borrowers also agree to share any profits from future home-price appreciation with the FHA. To do that, they'll pay a "3% exit fee" of the mortgage principal to the FHA when they resell or refinance.
Plus, they'll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.
After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays."
What does this mean to you? It means that FHA will be your equity-share partner until you sell or refinance your loan. You agree to share 50%-100% of any gain in value with FHA when you sell OR refinance to another loan.
If you sell in ten years, and after expenses of selling you have $100,000 equity, you only keep $50,000... FHA gets $50,000.
But wait... let's say that you want to refinance in five years because you can get a rate so compelling, you can't pass it up. FHA will compute your equity when you refinance, and you pay FHA 50% of any gain in value when you refinance.
Here's the bottom line: Take all the home owners with mortgage problems, bake them into a pie, and just a small sliver of the pie will qualify for this much bally-hooed bail-out.
Opportunities Are Everywhere...We Can Help You Find Your Dream Home.
Erick Blackwelder or Peggy James of Erick and Company - Exit 1st Choice Realty, Woodbridge VA. Realtors®, call 703-590-2252 list your property for sale or to purchase a property in Lake Ridge, Westridge, Old Bridge Estates, River Falls, Middle County, Cannon Bluff, Meadowbrook Woods, Blooms Crossing, Manassas Park, Beaver Creek, Hunter's Ridge, Brittany, Manassas, Montclair, Dumfries, Occoquan, Dale City, Nokesville, or anywhere in Prince William County.
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