by Upside Down Mortgage Loan Modification Expert - Dan North
HOPE For Homeowners Program (H4H) is a principal reduction program for an upside down mortgage. A short pay refinance allows you to refinance when your mortgage balance is greater than your market value. If your lender participates in this program you may be able to arrange a considerable principal reduction or combination of short payoff refinance and a new subordinate 2nd lien of the principal not written off.
New to this program is the option of principal reduction and a split of your mortgage into two liens, the 1st lien for up to a maximum 105% of market value and a subordinate 2nd for the balance of the principal due not forgiven in a principal reduction on the original mortgage, payments on this 2nd subordinate lien can be deferred for more than 36 months, qualifying you for a refinance. This second option is new as of 16 Dec 09 and is the most probable option that a lender will use with this program.
Principal Reduction With HOPE For Homeowners
HOPE For Homeowners is one option for Government help to reduce principal in an upside down mortgage. With a short refinance the original lender reduces the principal balance down to the maximum 105% of the home's market value or below.
Now a new lender can refinance the 1st lean or mortgage and pay off the original lender. This can be done with a straight write off of the principal balance above the maximum 105% of the market value or by splitting the 1st mortgage into two liens.
Principal Reduction And Equity Sharing With The HOPE For Homeowners Program
If your original lender does a straight write off of principal that is lower than the 105% maximum such as 90% of the market value, you will have 10% equity in the home when you complete the short refinance.
The down side of this 10% equity is that your lender will share in the equity on a sliding scale. In year one the lender will keep the entire 10% equity if you sell or again refinance.
This share in equity will drop by 10% a year until year five when the lender will share 50% of that equity (the 10% equity created with the short refinance).
The lender share will stay at 50% from year five onward, until you sell or refinance. If the future market value drops bellow the market value (at the time of the short refinance), the value of the 10% equity the lender shares decreases by the same drop in value.
For example: The current 1st mortgage balance is $250,000 and the current market value is $100,000:
The original lender writes off the principal balance above $90,000.
This would be a principal reduction of $160,000.
The short refinance amount is $90,000 with a market value of $100,000 and now there is equity of $10,000.
If you sell or again refinance in the first year your lender will keep the entire 10% equity (if the property value or sale price is $100,000 or greater).
Continuing the same scenario, if the Market value drops to $90,000 when you sell or refinance there is no balance of the original 10% equity remaining and the lender share would be $0. If the market value dropped to $95,000 the balance of the original 10% would be $5,000 and this amount would be split with your lender.
Splitting An Upside Down Mortgage In Two Under The HOPE For Homeowners Program
Under this short payoff program the original mortgage is split into two liens, the first lien will be for an amount up to a maximum 105% of the market value and eligible for refinancing with a new lender. The new subordinate 2nd lien would stay with the original lender and would be the principal balance above the maximum 105% of the home's market value that is not written off in the short payoff arrangement. Payments on this 2nd lien can be deferred for 36 months or more so it will not be included in the debt to income ratio when qualifying for the refinance with the new lender.
This option is likely to be much more appealing to lenders and investors than the original program. We will have to wait and see if lenders will pick up this new program variation.
HOPE For Homeowners Eligibility And Requirements
Property is borrowers primary and only residence with no other ownership interest in residential property (except for inherited real estate)
Mortgage must have originated prior to 1 Jan 2008
Borrowers net income can not exceed $1,000,000 (excluding Qualified Retirement Plans accounts)
Mortgages must be current to qualify
All mortgages are eligible for HOPE For Homeowners short refinance
There is no upper LTV limit on how upside down a property can be
When Will A Lender Approve HOPE For Homeowners Short Refinance
To be eligible aggregate payments on all mortgages must be greater than 31% of gross income
New H4H loan must be 30 year, fixed interest, FHA insured mortgage at prevailing interest rates and interest is negotiable between lender and borrower.
Maximum loan amount is $550,440
Maximum loan to value on new H4H mortgage is 105% of appraised value
Borrowers with credit score below 500, the maximum loan to value on the H4H mortgage is 90% of current appraised value
Closing cost and prepaid items may be financed in the mortgage or paid by any of the parties to the transaction
When Will A Lender Approve HOPE For Homeowners Short Refinance
As with any of the loss mitigation options with a lender or investor the determining factor is does this proposal make financial sense to the lender/investor.
First consideration is can the borrower make the new payments. Otherwise why bother to do any of this.
Will the HOPE For Homeowners short refinance save the lender/investor more money than foreclosing on the property
Is this the best option of the loss mitigation options to save the lender/investor the most money? If not but this option still saves more money for the lender/investor than foreclosure, you need to make a compelling argument to get the lender's/investor's backing to do a HOPE For Homeowners short refinance.
Per the Government guidelines on the Home Affordable Modification Program, while being considered for HAMP the lender is required to review your mortgage for HOPE For Homeowners short refinance qualification. This can be very advantages to you if you do qualify. Do your home work and ask that your lender specifically review your mortgage for the HOPE For Homeowners short payoff refinance. Better yet put together your own proposal with all required documentation as part of your submission. Use all tools available to you to get the resolution that you want and benefits you the most.
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