FHA to Encourage Principal Writedowns for Upside Down Michigan Homeowners

If you're an upside down Michigan homeowner that's current on your non-FHA mortgage and you owe more than 115% of your home's current value, FHA may have a deal for you!

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY

The government is getting more serious about bailing out the housing industry with HUD's latest announcement about the new FHA program.

It's potentially good news for upside down Michigan homeowners, as to make a loan eligible for the program, the lender must write down the principal balance AND make sure the payment isn't more than 31% of income. 

The program is voluntary for lenders, but if the government can get enough lenders to actually participate this could finally be the program that stabilizes the housing market.

Here are some highlights of the program:

• Voluntary option for lenders and borrowers with mortgages NOT currently insured by FHA.


• Encourages lenders and borrowers to work together, when appropriate, to restructure debts.
  
  
  
  • Loans must have a minimum writedown of 10% and all mortgages on a property total to less than 115% of the property's current value.
  
  
  
  


• Eligible upside down Michigan homeowners are refinanced into new FHA-insured loans on standard FHA refinance terms for documentation, income ratios and complete underwriting.


• Terms of FHA refinancing:
  
  
  
  • New FHA loan must be equal to no more than 97.75% of the current value of the property.
  
  
  • Combined mortgage debt must be written down to a maximum of 115% of the current value of the home.
  
  
  • Standard mortgage insurance premium structure will apply.
  
  
  
  


• Mandatory principal writedown as part of refinance.


• Minimum writedown by lender of at least 10% of the unpaid balance of the original loan.


• Reduced monthly mortgage payments to facilitate sustainable homeownership:
  
  
  
  • Rate on refinanced loan will be set at prevailing FHA interest rate.
  
  
  • Total monthly mortgage payment, including second mortgage, will not be greater than approximately 31% of gross monthly income.
  
  
  • Total debt service including all forms of household debt will not be greater than approximately 50% of gross monthly income, except for some borrowers with especially strong credit histories.
  
  
  
  


• Existing lenders can retain their second mortgages on the property, but only up to a combined 115% of the current value of the home.
  
  
  
  • If there is an existing mortgage that is not extinguished, lenders must agree to re-subordinate and extinguish any amount over 115% of the current value of the home.
  
  
  
  


• Homeowner Eligibility
  
  
  
  • Homeowners must be current on their mortgage payments.
  
  
  • Homeowner must occupy the home as their primary residence and fully document their income.
  
  
  • Homeowners must qualify under standard FHA borrower guidelines.
  
  
  • Homeowners must have a FICO credit score of at least 500.
  
  
  • Existing lenders' choice to consent for an FHA refinancing of this type is voluntary given the principal writedown requirement. Thus, not all homeowners who meet above criteria will receive an FHA refinanced loan.
  
  
  • As with any loan forgiveness, the short refinancing will be reflected on borrowers' credit score.
  
  
  
  

HUD plans to use up to $14 billion in TARP funding to support the FHA refinance options. The funds will be used to payoff second liens, provide incentives to servicers and provide coverage for some share of potential losses resulting from the newly refinanced loans.

Here's an example provided by HUD:

Example of a Typical FHA Refinance

• In 2006: Family A took out a 30-year fixed mortgage with a balance of $250,000 and an interest rate of 9.0%. Their monthly payment was about $2,000 per month.


• Today: Home prices have dropped and Family A's home is worth $180,000.


• With a FHA Refinance: Family A's loan balance will be reduced to $207,000 and their monthly payment will fall to about $1300 per month. This will reduce their principal balance by about $33,000 and reduce their monthly payments by about $700 per month, saving the family nearly $42,000 over the next 5 years.

When will this all be available to upside down Michigan homeowners?  HUD says,

"FHA will move to implement this as quickly as possible and expect that lenders can begin making decisions by the fall. Specific guidelines will be posted in a FHA Mortgagee Letter in the near future."

You can read HUD's press release about the program here, be sure to click on the links at the bottom for even more info.

Additional FAQs can be found at the Making Home Affordable website. 

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In addition to real estate lending, consulting and investing, Drew Sygit writes & speaks about the mortgage & real estate industries.  He holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor.  He's presented, spoken and/or written for HUD, Financial Planning Association, Financial Planners Association of Michigan, Michigan Association of CPA's, Institute of Continuing Legal Education, Oakland Real Estate Investors Association, North Oakland County Board of Realtors and numerous industry publications.  For speaking engagements and questions he can be reached at dsygit@TheLendingEdge.com.  He also publishes his own blog:  http://DrewsMortgageNews.com & has a FaceBook FanPage: www.FaceBook.com/TheLendingEdge.