Loan Modification Vs FHA – Hope For Homeowners Program
Over the past three to four years, a considerable number of homeowners have endeavored to negotiate a “loan workout” with their existing mortgage lender. The aim has been to secure reduced interest rates and more favorable loan terms. However, many lenders have opted not to entertain new terms and instead allowed properties to slip into foreclosure.
Due to the burgeoning volume of properties in foreclosure, lenders are now, albeit reluctantly, beginning to entertain loan modifications through their loss mitigation divisions. This presents a timely opportunity for homeowners to take proactive steps and request modifications that lead to more favorable terms and affordable interest rates, particularly if they hold high-interest, sub-prime loans or are at risk of foreclosure.
As the foreclosure rate continues to surge daily, the federal government, Congress, and the President have jointly passed a new bill. This legislation paves the way for homeowners to leverage a novel program known as “FHA – Hope for Homeowners” with the intent of rescuing over 400,000 homeowners from the looming threat of foreclosure. The program is set to go live on October 1st, 2008.
The new FHA loan program aims to assist homeowners currently facing foreclosure, those on the brink of it, or those saddled with high-interest mortgage loans, often referred to as sub-prime loans. This program stands apart from traditional loan modifications in several key ways.
Here’s a concise breakdown highlighting the distinctions between pursuing a loan modification and gaining approval for the FHA – Hope for Homeowners program:
- You have the ability to recalibrate your existing loan with the hope of securing a fixed, as opposed to adjustable, lower interest rate.
- The expenses associated with the loan modification are folded into the loan’s “back-end,” which inevitably increases the total amount owed.
- The loss mitigation department might opt to maintain the loan amount higher than your current home’s value, or they could choose to reduce it, but not to a degree that ensures long-term financial comfort. This scenario might put your financial stability at risk in the future.
- The primary motivation for your current lender to entertain keeping your loan on their books is the servicing rights they accrue over the loan’s amortization period. The predicament arises when numerous lenders have declared bankruptcy or withdrawn from the lending business due to the distressed credit markets. In such cases, servicing rights have been sold to other investors, causing considerable delays in the loan modification process. Timeliness is of the essence since homeowners often lack familiarity with the process and tend to initiate it too late. It is crucial to establish communication with your current lender and commence the loan modification process months before your home faces foreclosure.
- In case your initial request for a loan modification is denied, it’s advisable to consider reapplying after a few months. Some lenders may not adequately document your initial modification attempt. Their stance is frequently influenced by fluctuations in the housing market and their willingness to adjust shifts as more loans default. There’s no harm in trying again. Collaborating with a loan modification specialist, a seasoned loan officer, or a real estate attorney versed in mortgage lending and loan modifications is prudent. They possess the expertise required to engage effectively with the loss mitigation department personnel, gauging the prevailing sentiment and trends within your lender’s loss mitigation department.
- Many loan modification specialists collaborate with law firms to expedite the loss mitigation process. These law firms, in conjunction with loan modification specialists, ensure the original loan documents are devoid of fraudulent elements. While this approach is effective, it does incur additional costs for homeowners since both the loan modification specialist and attorney charge for their services.
- Homeowners are expected to bear the costs associated with loan modification specialists and attorneys. It’s a common misconception that these costs will be incorporated into the new loan amount. In reality, lenders are already incurring losses when they agree to alter loan terms and conditions for homeowners. Therefore, they are unlikely to include the costs of the loan modification in the new loan. Homeowners are required to remunerate the loan modification specialist and/or attorney directly. The expenses can range from $995.00 to $5,000.00 on average. Many loan modification specialists, senior loan officers, and attorney firms may collaborate to arrange a payment plan. However, most insist on an initial payment of at least half of the total fee before commencing the loan workout. It’s vital to comprehend that acceptance of your loan modification or workout is not guaranteed. Therefore, you are still liable to pay the agreed-upon fees to your representation. Fortunately, a significant proportion of loan modifications and workouts do gain approval, providing homeowners with a reassuring option as they endeavor to prevent foreclosure.
- Loss mitigation representatives typically do not necessitate homeowners to commission a fresh appraisal. Instead, they rely on the homeowner’s representative to furnish census track data, a broker price opinion (BPO), or a valuation report from a title company’s sales data.
- If you find yourself in foreclosure and have incurred expenses related to posting foreclosure sale data, attorney fees, title costs, or other charges, your current lender may require you to cover these costs as a condition for loan modification.
- Loss mitigation departments have the discretion to approve homeowners for a new loan, which may take the form of another adjustable rate or a tiered fixed-rate loan. Caution is advised. Careful research or a thorough discussion with your representative is recommended.
FHA – Hope for Homeowners Program:
- The Federal Housing Administration (FHA) mandates that all homeowners approved for this program accept a 30-year fixed-rate mortgage. No other loan types will be entertained; eligibility is confined to this specific program.
- The FHA will extend loans up to 90% of the current property value. This implies that if the purchase price of your property exceeded its current value, and your existing loan amount surpasses its current market worth, you can still qualify for a loan amount at 90% of your home’s current appraised value.
- If your property carries more than one trust deed lien (subordinate liens), and your property’s value has significantly diminished, your existing lenders may bear the brunt of the loss when you get approval under the “Hope for Homeowners Program.” Typically, subordinate lenders incur losses unless they acquire the primary lien. Most of them, however, refrain from taking on the primary lien, leading to financial setbacks for them.
- The FHA’s primary objective is to retain as many homeowners as possible in their residences. They understand that facilitating a homeowner’s loan is a more favorable outcome than letting a property go into foreclosure, enter the competitive real estate market, and further undermine housing values.
- The FHA’s underwriting guidelines currently exhibit a more lenient approach compared to other prevailing loan guidelines in the market. The FHA adopts a more forgiving stance when it comes to mortgage lending.
- As of October 1st, 2008, the FHA’s underwriting guidelines have yet to be disclosed. Lenders, processors, and underwriters will gain a clearer understanding of the requirements for loan approval as the date approaches.
- Homeowners will likely be required to fund a new FHA appraisal as a prerequisite for loan approval and closing. The exact costs will be determined by the underwriting guidelines, and homeowners should consult their loan modification specialist or loan officer for precise details.
8.Income-to-debt ratios will be elucidated and published in the underwriting guidelines. Homeowners are encouraged to consult with their loan officers regarding these specifics.
- Loan servicing companies that manage sub-prime loans may be more amenable to approving a loan modification. They may prefer transferring the lien to the FHA instead of retaining it on their balance sheets, given their substantial losses. It’s crucial to exhibit patience when dealing with these lenders, as they typically do not retain the original loan documents. They may need to request these documents, and loss mitigation personnel may be under pressure to make a swift determination. This could work to your advantage. Close cooperation with your loan officer to provide the required documentation is vital.
- If you reside in densely populated areas such as Los Angeles, Orange County, San Francisco, Seattle, Portland, Denver, Miami, and others, your chances of success with a loss mitigation department are likely higher. Concentrated housing areas have a higher percentage of properties in foreclosure, making lenders more motivated to accommodate loan modifications.
- Although the FHA underwriting guidelines have not been released as of yet, they will likely focus on the applicant’s ability to make the new housing payment rather than their credit score. This emphasis is on the applicant’s “ability to pay.”
- If your FHA – “Hope for Homeowners Program” loan application gains approval from the FHA, your current lender will still need to accept the conditions imposed by the FHA loan buyout. This means your existing lender may experience a reduction in equity by accepting the FHA loan buyout offer.
- The silver lining for your current lender in accepting the terms of an FHA buyout is that, under the FHA guidelines, they can participate in a share of any equity appreciation in the property for up to five years after the FHA acquires the loan. This particular condition could persuade many lenders to opt for the FHA loan buyout. You can seek further information from your loan officer regarding lender participation in equity gains.
- Many lenders are already “FHA approved lenders” and will mandate that your loan be restructured within the FHA loan division of your current lender. It’s prudent to verify if your current lender, as the note holder, holds an FHA license. This approach can save you time and potential complications since some loan officers may attempt to process the loan without ascertaining whether your current lender prefers handling the new FHA loan independently. Your current lender may stipulate this as a condition for FHA loan approval.
- Third-party costs, such as attorney fees, loss mitigation fees, foreclosure posting fees, and more, will be absorbed by your current lender under the FHA – Hope for Homeowners Program. As a homeowner, you won’t incur these expenses. The lender bears the brunt of this financial burden.
- As part of the Foreclosure Prevention Act of 2008, first-time homebuyers are encouraged to purchase homes between April 2008 and July 2009. Incentives include the potential to receive up to $7,500 in federal tax credits. This program is intended to stimulate the housing market by encouraging home purchases and, in turn, spurring home sellers to enter the market as well, often as “move-up” buyers. This program forms an integral part of the broader efforts to rectify the distressed housing market.