Here is an overview of the government sponsored 105% refinance and loan modification.
The Homeowner Affordability and Stability Plan (HASP) is the name of the whole plan. HAMP and HARP are parts of the plan. The plan offers many provisions for helping homeowners with a variety of issues.
Home Affordable Refinance Plan (HARP) Qualification
This plan is designed to allow homeowners who are underwater on their houses but successfully making their payments to refinance to today’s lower rates. It is what’s called a streamline refinance with minimal qualifying. To be eligible:
2. The home must be your primary residence. No investment or vacation properties.
3. You can’t have been more than 30 days late on your mortgage payment any time in the last 12 months.
4. Your refinanced first mortgage can’t exceed 105% of your home’s current appraised value.
Home Affordable Modification Plan (HAMP) Qualification - CONSUMER MUST CONTACT CURRENT LENDER ON THIS
This program is for homeowners in trouble–those whose mortgage payment is unreasonably high for their income (perhaps with a subprime loan or payment option ARM that reset to wacky terms). To be eligible:
1. Your housing costs must exceed 31% of your gross income. That’s monthly principal, interest, property taxes, and insurance.
2. The unpaid balance of your mortgage can’t exceed $729,750 (multifamily homes have a higher limit).
3. You may be required to attend credit counseling sessions if you’ve been silly with your money and have too much consumer debt.
4. Modification takes place first by lowering the interest rate (to as low as 2% if necessary). Then, if more needs to be done, the term of the loan can be extended to up to 40 years. Finally–only as a last resort–the balance may be reduced (to no less than the appraised value of the home). You must be able to realistically make a modified payment.
5. Mortgage servicers don’t have to make you a modification if you’re close to defaulting or you are at least 60 days behind on your payments. In that case, the servicer is required by law to determine if modifying your loan will generate more cash flow over five years than not modifying it. If it does, you get a modification. If not, the lender doesn’t have to modify your loan and if you default it can foreclose.
Say a borrower owes $400,000 on a $300,000 home. He makes $6,000 a month. Can he save his house with a modification?
The principal and interest payment on a $400,000 loan would be $2,935 at his current 8% rate. The whole monthly payment (including $854 for taxes and insurance) is $3,789, or 63% of his gross income. Obviously an impossible payment for him.
So how does modification work? First, the interest rate could be lowered. At 2%, the payment could be dropped to $1,478 (plus $854 for a total of $2,332). Oops, that’s still 39% of the homeowner’s gross income.
So stretch the term out to 40 years. The total payment drops to $2,179 ($854 + $1,325), which is still 36% of the gross income.
Dropping the loan balance nearly down to the home’s value ($303,400) gets him a payment of $1,859 ($854 + $1,005). That’s the magic number–31% of his income! So he can get a modification, yay! However, if before seeking help he let the mortgage go into default, the lender may not have to modify his loan.