As you know, the Federal Government announced a wide variety of very important changes for homeowners last Wednesday, March 4. Simi Valley home owners can start working on your own loan modification right now but you will have to wait a little longer for the 105% refinances. In the interest of keeping this email as brief as possible I am only going to concentrate on the loan modification piece after I say a few words on the amazing refinance opportunities many of you will have very soon. 105% Loan-to-Value (LTV) refis are just around the corner but the lenders are not set up to take these loans yet. The general guidelines have been announced (and are VERY AGGRESSIVE!!) but the programs and pricing are not coming out for another few weeks. If any of that changes before then I will let you know. These 105% refis are available for every conforming loan, whether it be investor, second home or owner occupied. In some cases there are income waivers available and in some cases there will be appraisal waivers. The cost of these refis will be less than normal and the rates should be very competitive. This will be a life saver for many homeowners.
Important Notes for 105% Refis:
- If you don’t have mortgage insurance on your current loan (AKA PMI or MI) then you don’t have to get new policy. This is HUGE as mortgage insurance is almost impossible to get these days and it will save you a lot of money every month if you don’t need it!
- If you currently have mortgage insurance you will have to convince them to transfer the old policy to the new loan, much easier said than done. You will probably need our help to accomplish this without pulling your hair out.
- If you have a second mortgage it will help and hurt you. While your LTV on your first is likely lower than 105% (the good news), you will have to convince the second mortgage to go back to second position (the bad news). This can be EXTREMELY difficult and you will need our help to get this done in many cases.
- The Feds are encouraging 2nds to take a “buyout” (i.e. We owe you $50K on our 2nd mortgage but how about $5K and we call it even?). Participation is voluntary by the lenders and is hard to come by right now. You will need our help (did I say that already?) if you are going to get lucky enough to get a buyout. Save those pennies…
- We are supposed to have these programs 4/4/09 or sooner. Most of these programs require a good payment history, you being current on your mortgage payment and your credit scores are still very important. While there is no minimum credit score, the guy with the 610 FICO will pay 3 points more than the guy with the 720 FICO (on a $400,000 loan that is $12,000!). Squeeze every last point out of your credit while you still have time and make those mortgage payments if you can. If you can’t then you are a better candidate for a loan modification.
Please call me if you have questions on the 105% refis right now. They will be available to everyone with a conforming loan very soon and are designed to lower your monthly expenses so that you can keep your home(s) without a lot of hassle. In many ways our government got this right except for the potential issues noted above.
On to loan modifications (AKA “Loan Mods”). These are really designed for “preventable foreclosures” and I have already had seemingly qualified people declined for these loan mods so be careful how you approach this. You have to demonstrate things have changed since you got your loan and you have to show financial hardship. If you aren’t having financial trouble (which is a good thing) then you are probably not a good candidate for a loan mod. In addition, these loan mods only last for 5 years in most cases so if your plan is longer term it’s best to consider a refi if you can get one. Be aware that you may have to prove everything you say on these loan mods in writing according to the guidelines so make sure you keep excellent notes on your conversations with the lender(s). I recommend you make a call log for every call, every person you talk to and make sure get their call center location in case you need to track them down again.
Loan Modification Guidelines:
- The borrower must have had a change in circumstances that causes financial hardship, or is facing a recent or imminent increase in the payment that is likely to create a financial hardship (this means anyone with an ARM that will adjust is eligible). The lender must ask about current income and assets and current expenses as well as the specific circumstances relating to the claimed financial hardship. Each of these elements shall be verified through documentation.
- The home must be an owner occupied.
- The home must be a primary residence (verified with tax return, credit report, and other documentation such as a utility bill).
- Borrowers in bankruptcy are not automatically eliminated from consideration for a modification.
- First lien loans must have an unpaid principal balance (prior to capitalization of arrearages) equal to or less than $729,750.
- Loans can only be modified under the “Home Affordable Modification” program once.
- Subordinate liens are not included in the Front-End DTI calculation, but they are included in the Back-End DTI calculation (see below).
- Servicers are required to”escrow” for modified borrowers’ real estate taxes and mortgage-related insurance payments immediately. This means every modified loan will have “impounds” and you will have to pay your taxes & insurance monthly moving forward.
- Redefaulting Loans will be terminated from the program, and no further payments of any kind will be made to the lender/investor, servicer, or borrower. Redefaulting Loans should be considered for other loss mitigation programs prior to being referred to foreclosure.
- The investor may not require the borrower to contributeany cash to close the loan mod.
- Unpaid late fees will be waived for the borrower. These include late fees prior to the start of the Trial Period and accrued during the period.
- The borrower’s income will be verified by requiring a signed Form 4506-T (Request for Transcript of Tax Return) and obtaining the most recent tax return on file for each borrower on the note. For wage earners, the two most recent pay stubs for each wage earner on the note will also be required. For self-employed borrowers or for non-wage income, the borrower’s income will be verified by obtaining other third party documents that provide reasonably reliable evidence of income. Borrowers must also represent and warrant that they do not have sufficient liquid assets to make their monthly mortgage payments. Better hide those millions!
- You do not have to trash your credit to be eligible, if you meet the hardship requirements you can still keep up your credit.
- There are no modification fees or charges borne by the borrower.
Front-End Debt-To-Income (DTI) Target:
These loan modifications are designed to get your payment to 38% of your gross income. Here is the easy way to figure that out: Take your current gross income and divide by 12 then multiply that number by .38. That is your new target payment including your principal, interest, taxes, insurance and HOA fees (PITIA). For example: You make $60K per year which is $5000/mo x .38 = $1900/mo target payment.
- Mortgage insurance premiums are excluded from the PITIA calculation.
- The Front-End DTI Target is 31%. The government and your lender will contribute additional monies after you make your first 3 payments on time to get your payment to 31% DTI (In our example new payment reduced to $1550 if you make your first 3 payments on time).
- The minimum interest rate “floor” on these loan mods is 2% with no exceptions, your rate might be higher but not any lower. This means that if our payment of $1900 requires a 1% interest rate instead of 2% or more then you will not get the loan modification unless they forgive you enough principal to qualify or if the lender defers a portion of your principal. This might add another layer of complicating factors but at the end of the day, if you are successful with this you will be very happy.
- Some borrowers will be required to work with a HUD approved counselor if their other debts are too high and the loan modification will not take effect until they provide a signed statement indicating that they will obtain counseling.
- In many cases you will get $1000 each year for the next 3 years if you remain current on your loan mod.
Interest Rate Cap:
- The modified interest rate must remain in place for five years, after which time the interest rate will be gradually increased 1% per year or such lesser amount as may be needed until it reaches the Interest Rate Cap.
- The Interest Rate Cap for the modified loan is the lesser of ( A ) the fully indexed and fully amortizing original contractual rate or ( B ) the Freddie Mac Primary Mortgage Market Survey rate for 30-year fixed rate conforming mortgage loans, rounded to the nearest 0.125%, as of the date that the modification document is prepared.
What if you don’t qualify:
- The lender/investor must seek other foreclosure prevention alternatives, including alternative modification programs, deed-in-lieu and short sale programs.
To Wrap This Up:
I know there is a lot to digest here, please feel free to email me or call me with any questions. We, here at Sherwood, want to help you as much as possible but we don’t do these loan mods for any sort of fee, we actually help you for free. People ask me why I don’t charge for any of this and I respond that we do a ton of things for our clients for free and helping them is one of those things. I spend at least 20% of my time doing free things for people and that is not about to change.
We will certainly help you through the loan mod process but we absolutely can’t do it for you nor do we believe you should pay someone to do thisfor you, you are more than capable! Many of these so called loan mod companies are just fee generating machines that do very little for their clients and keep most of their “money back guarantee” money (read the fine print). If you do find you need professional help I have a local law firm I can refer you to that I trust. Otherwise, this whole thing is much cheaper and safer to do on your own. I have heard stories of these things only taking a few hours in many cases. I think we all have a few hours to improve the course of our lives in these uncertain financial times.
I will be in touch soon with more news on the 105% refis as well as a few stories to share on loan mods. Until then, please feel free to contact me with anything I might do for you, your friends, your family and your co-workers. Rates are still phenomenal and you can always count on us to give you the right advice.
Talk to you soon!
Michael Chabot Mortgage Professional
See Related Stories from Michael Chabot: A Fist Full of Dollars – Part I Foreclosure Prevention Act 2008