New Options For Mortgage Modifications

On Wednesday, it was announced by the Federal Government that there is a new loan modification program available for homeowners.  This new program is specifically designed to help a larger percentage of homeowners, given the new program does not require the borrower to prove their income or financial hardship status.

The Streamlined Modification Initiative requires that borrowers with home loans that are backed by  Fannie Mae or Freddie Mac must be at least 90 days past due on their current mortgages,  and they must be able to  make three consecutive trial payments on time. This new program is headed by the Federal Housing Finance Agency, the agency that regulates both Fannie May and Freddie Mac.

Initiative Explained

Past programs, including HAMP, or Home Affordable Modification Program required all borrowers to show proof in documentation of their financial situations, including income and financial hardship information.  The requirement of this proof led to many mortgage servicers being unable to provide modifications for risky borrowers, which in turn minimized the overall effectiveness of the modification programs themselves.

Starting July 1, 2013, the new initiative will allow for the more lenient requirements.  By this date, all mortgage servicers are required to contact all delinquent borrowers by mail and offer them a chance at loan modification.

The new initiative will provide borrowers with a new interest rate that is either equal to or lower than the current rates they are paying.  The rates will be based on the typical averages of 30-year fixed rate mortgages, and borrowers will be allowed a longer term-up to 40 years.  Additionally, any borrower that owes more money on their homes than the actual home is worth will not be required to pay any interest on up to 30% of the overall unpaid balance.  The predicted savings on monthly mortgage payments is around 30% per borrower.

Eligibility Requirements

Eligibility requirements for the new program state that homeowners must be currently between 90 days and 24 months past due  on their loans, and their first lien mortgage must be at least 12 months old.  Additionally, the total amount that the homeowners currently owe on their mortgage must be at least 80% of the home’s total value.

The FHFA has stated that there are various screening measures in place that will make certain this new initiative program cannot be exploited-in other words, homeowners that purposely stop paying their mortgages will not be able to qualify for a mortgage modification.

Currently, the FHFA does not have a specific number of expected borrowers for the new program, but a recent pilot program showed that 70% of individuals that were offered the new program were willing to participate in the trial, and 50% of those individuals actually obtained a loan modification.

Currently, it is estimated that 1 in every 5 homeowners owe more money on their mortgage than the actual value of their home.  This alone is what is slowing down the overall improvement of the real estate market.

In their fourth quarter, Fannie Mae and Freddie Mac have provided assistance for 130,000 homeowners in order for them to avoid going into foreclosure.  Since 2008, they have helped approximately 2.7 million mortgage borrowers avoid foreclosure completely.  This calculation includes 1.3 million borrowers who were saved through repayment and forbearance plans, loan modifications, and short sales.

The Aftermath Of The Housing Bubble

In the early 2000’s, mortgages were very easy to obtain, almost too easy in many cases, and this is one factor that ultimately lead to the bursting of the housing bubble.  Five or ten years ago, high risk borrowers could potentially obtain loans with minimal down payments and less than perfect credit, and while these loans were helpful at first, all it took was one or two missed payments to start a downward spiral, eventually leading to foreclosure.

In today’s lending world, however, there has been a complete turnaround when it comes to qualifying potential borrowers, such a big turnaround, in fact, that many hopeful borrowers are completely surprised by the rigorous application process that now goes along with obtaining a mortgage, due to new Federal regulations that lenders must stand by.

Here are a few roadblocks you may come across when applying for a mortgage in today’s post housing crisis world, and some tips on what you can do to ensure approval.

Down Payments

While qualifying for a loan without a down payment is still possible in certain cases, it is definitely not the norm anymore.  If you are looking to obtain a loan with a low or no down payment, there are a few options.  There are a few loan programs that are backed by the Dept. of Veterans Affairs that allow qualified borrowers that meet specific guidelines the option for a loan with no down payment, and FHA loans are still allowing for low down payments.  However, FHA loans used to allow for down payments of 3 percent or less, and now the minimum percentage has moved up to 3.5.

Debt-to-Income Ratio

Five to ten years ago, many families could qualify for a mortgage with a 60 or 70 percent dent-to-income ratio.  In today’s world, the standard is approximately 43 percent.  There are various factors that contribute to this that include the current economy and job market, and lenders simply do not want to take the risk that borrowers will be using their funds to take care of additional debt instead of paying their mortgage on time.  Additionally, today’s lenders will investigate further when it comes to borrower’s employment.  They will inquire about overtime as well as length of employment in order to get a true picture of what a borrower can afford, and this can definitely be a roadblock to those who have recently started working again after a lengthy bout of unemployment.

Proper Documentation

If you are hoping to obtain an affordable mortgage loan, you will want to make sure you have all the proper documentation in order before starting the application process.  Documentation you will need includes bank statements, tax returns, and social security information.  Lenders have an obligation to thoroughly review these documents as well as compare notes with the IRS, so it is important to have all your ducks in a row before getting started. It is also important to note that when the lenders compare bank statements to income statements, they will expect a full explanation of any extra money that is not coming directly from an employment check, so it is always a good idea to keep your receipts, especially if you do contract work in addition to your regular job.

Credit Score Requirements

At one point in time, a mortgage could easily be obtained with a credit score of 580 or higher.  Today’s rules typically require at least a 620 score, and that is on the low end.  The average credit score that is preferred now is between 720 and 765.  If your credit score is currently on the low end, you may wish to hold off on applying for a mortgage until some of your debt is paid off and you have increased your score.  Not only will this better your chances of qualifying, it will also help eliminate excess monthly debt that you can put toward your mortgage payments.

New Mortgage Lending Standards

While today’s mortgage application process can be a bit frustrating for potential borrowers, the reality is that something had to be done in the wake of the economic collapse and housing crisis.  Not only were risky borrowers defaulting on their mortgages, hard working individuals were losing their jobs and ending up in default as well.

With the newer standards, there is definitely hope for more stability in the mortgage market.  Potential borrowers now need to take a realistic look at their finances and overall ability to pay, and lenders are cracking down in order to keep the market in check.  While the detailed application and approval process may annoy seasoned borrowers, borrowers that are new to the home buying process will definitely benefit from the changes.

A high credit score and verifiable income assures lenders that these mortgages will not go into default, and potential home buyers will be able to obtain mortgages with confidence and the peace of mind that they can realistically cover their payments each month, allowing for a win-win situation for both lender and borrower.