Loan Modification Vs FHA – Hope For Homeowners Program – Comparative Analysis!
In the last 3 or 4 years, a large number of homeowners have been trying to complete a “loan workout” with their current mortgage lender to lower the interest rate and improve the terms of their loan. Many lenders have chosen not to accept any new terms, rather, let the property go into foreclosure.
Because lenders have an overwhelming number of properties in foreclosure, they are starting to accept loan modifications via their loss mitigation departments. The time is ripe for consumers (who own homes) to take action and request that their loans be modified towards better terms and a lower interest rate they can afford, if they have high interest rate sub-prime loans or are at risk for foreclosure.
Since, the rate of foreclosures is increasing, everyday, the federal government, congress and the president have approved and signed a new bill which will allow homeowners to take advantage of a new “FHA – Hope for Homeowners Program” designed to save more than 400,000 homeowners from foreclosure. This program will go “live” on October 1st, 2008.
The new FHA loan program will assist homeowners who are currently in foreclosure, close to foreclosure or those who have high interest rate mortgage loans like those called sub-prime loans. The program is different than a loan modification in several ways.
The following is a bulleted layout of the deference’s between completing a loan modification and getting approved to do a FHA -Hope for Homeowners program.
1. You can recast your current loan into different terms, with the hope to benefit from a lower interest rate, which is fixed rather than an adjustable interest rate.
2. The costs of the loan modification are rolled on the “back-end” of the loan, which will increase the amount of money you owe.
3. The loss mitigation department may choose to keep the amount (that you own on your loan) higher than your current home value. Or they may choose to lower that amount, some, but not as much as it could be to make your new payment comfortable in the long term. This could mean that you may be in financial jeopardy, in the future.
4. It’s a fact, what cause your current lender to be interested in keeping your loan on their books are the servicing rights. They make money servicing your loan over the term of the amortization schedule. The problem is that many lenders have filed for bankruptcy or just got out of the business (due to poor credits markets) and the servicing rights have been sold to other investors. This often causes a strain, since; the servicer does not actually have your loan documents at their facility, so they rely on others to get your original loan information to them for review. This process can cause the loan modification workout to be slow, in many cases. Timing is very important, since, homeowners are not knowledgeable in the process and they often wait to late to get the loan modification process started. It is important to communicate with your current lender and get the loan modification process stated, months before your home goes to foreclosure sale.
5. If your request for a loan modification is rejected, you may want to try it again in a few months, since; some lenders don’t document the loan modification attempt you made. They are often motivated by changes in the housing market and their intent changes as more and more loans go into default. It does not hurt to try again. It is smart to work with a loan modification specialist, a seasoned loan officer or an attorney who specializes in real estate, mortgage lending and loan modifications. They understand how to speak to loss mitigation department, personnel and can get a general idea of the mood and trends of your lenders loss mitigation department.
6. Many loan modification specialist work together with attorney firms to get the loss mitigation departments to act in a timely manner. Those same attorney firms work with the loan modification specialist to make sure the original loan documents are not fraud ridden. This is a good approach, yet it can cost the homeowner additional money, since both the loan modification specialist and the attorney need to be paid for their services.
7. Homeowners are required to pay the loan modification specialists and attorneys for the services, provided. Many homeowners think that the cost will be included in the new loan amount, but this is not the case. Logically, lenders are already losing money when they agree to modify the loan terms and conditions for the homeowner, so, you can bet that they will not agree to “package” the costs of doing the loan modification into the new loan. That cost is paid by the homeowner, directly to the loan modification specialist and/or the attorney. The cost can range between $995.00 and $, 5000.00; as an average. Many loan modification specialist, senior loan officers and attorney firms can work out a payment plan, yet, many require at least 1/2 upfront before they start the loan workout. Understand, there is no guarantee that your loan modification or loan workout will be accepted. You will still have to pay your representation your agreed amount. A large percentage of loan modifications and workouts are accepted. So, it’s a good bet, since, most people do not want to loose their homes to foreclosure.
8. Loss mitigation representatives, (most often) do not require you to pay for a new appraisal. Instead, they have your representative provide census track data, a BPO (broker price opinion) or a print out of valuation from title company market sales data. 9. If you are in foreclosure and costs have been incurred from posting your foreclosure sales data, attorney fees, title costs or other costs; you could be liable for those costs, if our current lender requires it (as a requirement to the loan modification).
10. Loss mitigation departments may choose to approve you for a new loan which is (another adjustable or tiered -fixed loan). Be careful. Do your homework or “talk-it-over” with your representation.
FHA- Hope for Homeowners Program:
1. The federal housing administration (FHA) has required that all homeowners who become approved for this program accept a 30 year fixed rate program. No other loan types will be accepted. You can only qualify for this program.
2. FHA will loan up to 90% of the current value of your property. This means that if you purchased your property for a higher purchase price and currently have a loan amount higher than what the value of the property is presently, you can become approved to do a loan amount at 90% of what your current house is worth.
3. If you have more than a 1st trust deed lien (subordinate liens) on your property and your property value has severely, diminished; your current lenders may take the loss when you get approved under the “Hope for Homeowners Program”. Usually, the subordinate lenders loose, unless they purchase the primary lien. Most do not purchase the 1st trust deed lien. So, the subordinate lender takes a loose on their investment.
4. FHA’s goal is to keep as many homeowners in their homes. They understand that it would be better to do a loan for a homeowner rather than have that property go into foreclosure, be place into the retail real estate marketplace, causing a further degrading of the housing market.
5. The FHA underwriting guidelines are currently more liberal than any other loan guidelines in the current market. FHA is more forgiving in their approach to mortgage lending.
6. The FHA underwriting guidelines have not been disclosed. As October, 1st, 2008 approaches, lenders, processors and underwriters will have a more clear idea as to what is required to get a loan approval.
7. Homeowners will (probably) be required to pay for a new FHA appraisal, as a condition for loan approval and closing. Underwriting guidelines will determine if this is true. The average costs for an FHA appraisal is ranges, $300 – $450.
8. Income to debt ratios will be determined and posted in the underwriting guidelines. Consult your loan modification specialist or loan officer.
9. The loan servicing companies that service, sub-prime loans will (probably) be more inclined to accept a loan modification, since they will want to transfer the lien to FHA, rather than keep it on their books. They have taken huge losses and have an overwhelming desire to get rid if their current problems. Have patience with these lenders, since, they do not keep your actual loan documents at their facilities. They will have to request them. Many loss mitigation personnel are stressed and will want to make a determination as to your file, fast. This is an advantage to you! Work closely with your loan officer to get the items needed for loan submission.
10. If you live in a heavily populated area like Los Angeles, Orange County, San Francisco, Seattle, Portland, Denver, Miami, etc., you will more than likely have a higher percentage of success with a loss mitigation department. This is because there are more homes in foreclosure in concentrated housing areas.
11. Even though we have not seen the FHA underwriter guidelines, (since they have not been delivered to the underwriters) they will be available on or before October, 1st, 2008. We can expect that the guidelines will probably focus on a person ability to make the new housing payment and not the persons credit score. We call this “ability to pay”!
12. If you’re, FHA -“Hope for Homeowners Program” loan application is accepted by FHA; your current lender will still have to accept the condition which FHA places on the loan. This means that your current lender may to take a loss in equity by accepting the FHA loan buyout, offered.
13. The good news is that your current lender (already) understands that they will take a loss in equity, if the property goes into foreclosure. If they don’t accept the FHA buyout, they may have to place your foreclosed property into the retail sales marketplace. This means that they may have to pay a Realtor up to 6% commission, wait for the property to be purchased, incur additional holding cost, pay a gardener, electricity and water bills. All the while, they realize that the property will probably be reduced in value even more as additional foreclosure properties come on to the marketplace. This is not a rosy situation for them, so, most will realize that it would be better to sell the loan to FHA and take less of a financial loss.
14. The main benefit to your current lender in accepting the terms of a FHA buyout is that under the FHA guidelines, they can benefit from a portion of any equity gain in the property for up to 5 years, at the time FHA buys the loan. If the homeowner chooses to sell the home within the 5 year period after the close of the new FHA loan; the lender can participate in a percentage of any equity gain. This single condition will cause many lenders to accept the FHA loan buyout. Ask your loan officer for information regarding lender participation in an equity gains.
15. Many lenders are fully; “FHA approved lenders” and will require that your loan be recast within the FHA loan department of your current lender. Therefore, ask your loan officer if your current lender (note holder) is FHA licensed. This will save you time and headaches, since; many loan officers will try to do the loan on your behalf without determining if your current lender wants the new FHA loan on their own books. This may be a condition for an FHA loan approval, by your current lender. If our current lender is already an approved lender, they might as well sell the loan to FHA, direct, correct?
16. Third party cost like, attorney fees, loss mitigation fees, foreclosure posting fees, etc., will be absorbed by your current lender under the FHA – Hope for Homeowners Program. You will not incur these fees under the program. The lender will take this loss, too.
17. As part of the Foreclosure Prevention Act of 2008, 1st time homebuyers are encouraged to purchase homes between April, 2008 and July 2009. They can receive up to $7500 dollars in tax credits from the federal government. This program has been established to speed up the housing recovery by getting people to purchase homes. Additionally, it will cause home sellers to purchase homes, as well, since they are often “move up” buyers. This program is part of the overall attempt to correct the bad housing market.
18. Credit Score vs. Your Ability to Make the Payment: These two factors will be outlined in the underwriting guidelines. I would expect that the ability to pay will override the credit score issue, since, most people having problems making their housing payments, already, have degraded credit scores. Consult your loan officer for details.