“Can I reduce my mortgage? I’m out of work and I have no equity in the house.” This was a question our friend Kathy asked me not long ago. She was in serious financial trouble. She asked me how to get her mortgage loan modified and/or how to reduce her mortgage payments.
Her situation is not unique; she’s a single mom who owes more on her home than it’s worth. When she bought it, she could afford the payments, but now her income is way down and she can’t afford the monthly nut.
She called the bank and explained her situation. She told them that she didn’t want to walk away from the property, but she needed some help. All she wanted to do was refinance to a more reasonable interest rate. The bank transferred her from one department to the next with no result. Surprised?
Some of her friends told her to stop making payments on her home. That would get the bank to wake up, they said.
Others cautioned her against this strategy. What would you do in this situation?
I did some digging and looked into the “Making Home Affordable” program rolled out by our benevolent government. It seems like this program is tailor-made for Kathy. It’s designed to help those who are unable to refinance their homes and lower their interest rate expense because they have no equity in the property.
There are two programs, really. The first is “HARP,” which is for loans owned or guaranteed by Fannie Mae and Freddie Mac. “FHA Hope for Homeowners” is the second and can be used for any type of loan.
To take advantage of the programs, you must be current on your mortgage payments and the balance of the first mortgage can’t exceed 125% of the current market value. Also, you must be deemed able to make the new monthly payments.
If you do qualify, the new rate is based on market rates at the time of the refinance. In Kathy’s case, this would make her home affordable.
All Kathy had to do was call her mortgage holder and ask for a Home Affordable Refinance application or use any Fannie Mae or Freddie Mac approved lender. (Almost all major banks are approved.)
To quality, the original loan must have been created on or before 1/1/09 and the principal balance must be equal or less than $729,750 for single family homes. Also, you must occupy the property as a primary residence. Finally, you must have a financial hardship that you can document. One measure is if your monthly mortgage payment is more than 31% of your monthly gross income.
This program expires June 10, 2010, so I suggested that Kathy try to get the ball rolling as soon as she can. Many people are aware of the program, but not many realize the clock is ticking.
If you were Kathy, would you try to qualify for these programs? What else should she do?