Q: I was laid off several months ago and have been unable to find a new job. Payments on our home have exhausted our savings; a property tax increase has added to the burden. I heard about a loan modification program, but my husband is reluctant to use it. How would it work? Would I have to pay anything back?
A: I may have some very good news for you. In February the Obama administration announced the Homeowner Affordability and Stability Plan to help people who are having trouble paying their mortgages stay in their homes. But let me make something clear: Federal assistance is not about avoiding payments outright. That would not be fair to any of us.
Let's walk through what assistance may be available to you. The Obama plan has two parts: a refinancing program and a loan modification program. We'll start with the refinancing piece. Right now mortgage rates are near historic lows: about 4 to 5 percent for a 30-year fixed-rate loan. So anyone with a rate of 6 percent or higher would see monthly payments go down significantly if they could refinance into a new mortgage. Problem is, because of falling home values, many homeowners do not have the 20 percent equity in their homes typically required to refinance. But under the new program, even if you have no equity, you may be able to refinance. In fact, if you are no more than 5 percent underwater—meaning the amount owed on your mortgage is no more than 5 percent higher than the current appraised value of your home—you still may be able to refinance. You must be current on your house payments, though, and your mortgage must be owned or backed by either Fannie Mae or Freddie Mac (56 percent of mortgages are). To find out if your loan qualifies, check out fanniemae.com/loanlookup or freddiemac.com/mymortgage . The Treasury Department estimates that up to five million homeowners could get relief from this program.
Now, if you are more than 5 percent underwater, you won't be eligible for the refinancing plan. But you may be eligible for the loan modification program, which is designed to reduce your mortgage costs temporarily. Here's how it works: Your lender will look at the percentage of your gross monthly income that's eaten up by your mortgage payment, property tax, and insurance payment. This percentage is your debt-to-income ratio (DTI). If it is above 31 percent, the federal government will offer your lender financial incentives to lower your mortgage payments to an affordable level. To push your payments down, the lender can reduce your interest rate to as low as 2 percent, extend your mortgage to 40 years, or even waive interest payments on part of your loan. Your new mortgage payment will be good for up to five years, at which point it will gradually increase to a permanent fixed rate equal to what the 30-year fixed rate was at the time your reduced mortgage went into effect.
The Treasury Department estimates that this program could keep three to four million Americans out of foreclosure. I hope you're in that mix! To find out about both of these programs and to see if you are eligible, go to makinghomeaffordable.gov .
I also urge you to keep up your job hunt. The economic stimulus package should spur the creation of new jobs, and as I explain in "Help for Families" (page 44), the assistance plan also offers important benefits for those dealing with a layoff.