Refinance Options for Underwater Homeowners
We all know people who are having trouble keeping up with their payments but could not refinance because they are underwater (or close to it) on their loan. Many were not willing to refinance because it would push them above the magic 80% Loan-to-Value ratio, which would necessitate getting mortgage insurance (MI) - which either they could not get (usually due to a credit score or a Debt-to-Income issue) or which would increase their monthly payments to the point that is negates any drop in payment from a lower interest rate.
Well, over the last few months, a couple of programs have been launched or expanded which would help people in these situations - but don't seem to have made much impact in the media, either here in Arizona, or nationally. A large number of people I speak with, even realtors, are not aware of these changes, so I wanted to touch on the basic requirements to qualify.
There are two programs - for Fannie Mae loans, DU Refi Plus (catchy title!), and for Freddie Mac loans, The President's Making Homes Affordable Program (who thinks of these?). If you have a conventional loan (not FHA, VA or USDA) then you most likely have a loan owned by Fannie or Freddie. (Note - it will be serviced by Bank of America, Citi, Flagstar, etc)
The programs have a few differences, and investors may have some extra requirements, but the main points are:
- You can refinance up to 125% of the home value. This is huge for many homeowners. For example, if you owe $310,000 and home prices have fallen to the point that your home is worth $250,000, you are at 124% Loan-to-Value and can potentially refinance. The previous limits on these programs were 105%, so this is a big improvement, and will bring a large number of homeowners to a place where they at least have an option. However - there is a catch. As most lenders will consider a higher LTV to come with a higher risk, the interest rate also gets higher. So if you are at 120% LTV with a 6% interest rate, this may not be worthwhile. If your rate is higher, maybe it is. You really need to have a good loan officer run some scenarios for you to determine if this is in your long term interest and something worthwhile for your unique situation.
- There should currently be no mortgage insurance. If there is mortgage insurance on the property (i.e. at the last refinance or when they bought it, the owner put down less that 20%) then, for now at least, they need to go to their current loan servicer who is the only lender which can refinance them. And quite honestly, results may vary. If there is no mortgage insurance - here is the great news - there is no requirement for mortgage insurance on the new loan, even up to the maximum LTV.
- The borrower can have no payments more than 30 days late in the last 12 months. When a loan modification 'expert' tells you not to make your payments, run for the hills.
- The refinance must result in either (a) a lower interest rate (b) convert an ARM, interest only or balloon mortgage into a fixed rate loan, or (c) reduce the term of the mortgage.