Making Cents: The Government Stimulus and Your Mortgage

[i](Editor’s Note: Doug Keegan this week debuts a new segment on the Lincoln Institute’s weekly public affairs radio program, Lincoln Radio Journal. On his first report, Doug talks about how the government stimulus program could affect your mortgage. To listen to the interview click on www.lincolnradiojournal.com.)[ei]

The Government Stimulus and Your Mortgage

Introduction

From the stimulus bill to the homeowner affordability and stability plan, congress has passed sweeping legislation over the past few months in an attempt to help home owners and the housing market recover. Here to discuss the particulars and how you can benefit is Doug Keegan.

What was in the stimulus bill to help the housing market?

If you are first-time homebuyer, you are really going to like what’s in the stimulus bill:

• increased the first-time homebuyer tax credit to $8,000
• eliminated the requirement to pay it back
• extended the deadline to December 1st of this year
• made the tax credit refundable, meaning that if you don’t pay taxes, but you qualify, the government will actually send you a check.
• can claim the credit on your 2008 tax return. If you have already filed for 2008, you can file an amended return and get the credit sooner than later.

The first-time homebuyer tax credit was originally created by the Housing Assistance Act of 2008 under President Bush’s administration. While that legislation provided a tax credit of $7,500, you had to pay it back. So, under the new provisions you are getting a really good deal.

This doesn’t mean, however, that you should run out and buy a house just to get the credit. You should only buy a house when you can afford it.

Who qualifies?

To qualify, the rules stipulate that anyone who has not owned a home in the past three years is eligible for the credit. For married couples to be eligible, neither of them may have had an ownership interest in the past three years, even if they choose to file their taxes separately. Also, to qualify for the full credit, your income must be below either $150,000 (for married couples) or $75,000 (for individuals).

Moving on to the homeowner affordability and stability plan, for short we’ll call it the mortgage assistance program, who is this program for?

The program is designed to help struggling homeowners. It has two components.

1. One is a refinancing program aimed at homeowners who have less than 20 percent equity in their home or who owe more than their home is worth, in fact up to 5 percent more. The objective is to help borrowers get into more affordable loans. It may not mean an immediate reduction in their payments, but it could mean switching from an interest only loan or an adjustable rate loan to a more reasonable fixed rate loan.
2. The other program is aimed at homeowners at risk of losing their home. Basically, homeowners who are on the verge of foreclosure. This program attempts to lower their monthly payments to affordable levels. As opposed to refinancing, this would be called a loan modification.

When did these programs start?

March 4th.

Who qualifies for the refinancing program?

As I mentioned before, to be eligible, you have to have less than 20 percent equity in your home or you owe more than you home is worth, up to 5 percent more. It is only open to homeowners who are current with their payments and have loans that are owned or guaranteed by Fannie Mae and Freddie Mac. These refinancings are also available for second homes as well as investment properties in some cases.

The refinance program ends June 2010

Let me give you an example. Let’s say you bought your home 4 years ago for $200,000. You owe $170,000 on it. Because of the housing market, your home has dropped in value and is now worth $164,000, down 18 percent. In this scenario, you would qualify for the refinancing program because you owe about 4 percent more than your home is worth, just under the 5 percent limit.

How do I find out if my loan is owned or guaranteed by Fannie or Freddie?

Your loan servicer or mortgage broker should be able to determine that. But on your own you can contact either Fannie Mae or Freddie Mac. Both have toll-free numbers. Fannie Mae is 1-800-7FANNIE and Freddie Mac is 1-800-FREDDIE.

Do I have to pay a fee for a refinanced loan?

Yes. Lenders or mortgage brokers may charge fees, which are likely to vary. That is why it is important to get a "Good Faith Estimate" that includes your new interest rate, mortgage payment, and the amount you will pay over the life of the loan to compare it with your current loan terms. If it’s not an improvement, don’t do it.

Let’s talk about the loan modification program, how do I know if I qualify?

For starters, it’s for people who are really struggling to make their mortgage payments and are frankly at risk of foreclosure. To qualify for the program, your monthly mortgage payment has to be 31 percent or more of your gross monthly income. Your mortgage payment for this calculation includes taxes, insurance and any association fees. To do the math, just take your monthly gross pay, multiply it by 31%, and if your mortgage payment is above that number, you qualify.
The loan modification program applies only to your primary residence and the unpaid loan balance must not exceed $730,000.

The loan modification program ends Dec. 31, 2012

What can lenders do to modify the loan?

Under this program, lenders will help their customers’ lower their monthly mortgage payments to 31 percent of their gross monthly income. That could come from lowering the interest rate to as low as 2 percent or extending the terms of the loan. Lenders can also lower the principal owed by the borrower or stop charging interest on a portion of the loan, known as principal forbearance.

These terms are only temporary and are designed to help get people back on their feet.

If someone thinks they qualify, what’s the first step?

Call your loan servicer or mortgage broker.

If you want a housing counselor to help you, you can request free counseling, that’s the operative word here, free counseling from a HUD-approved counseling agency. Call 1-888-995-4673.

Please, please avoid firms that charge you a fee for helping you get a loan mod. You do not have to pay a fee for the loan modification. Avoid the scam artists.

Aside from lower payments, what are the benefits of participating?

Homeowners who stay current on their mortgage after the modification will be eligible for an incentive payment of up to $1,000 a year from the government for five years. The bonus would be applied to the borrower’s mortgage to lower the principal balance.

The plan also rewards lenders with as much as $1,000 for each modification and another monthly "pay for success" fee as long as the borrowers stay current. In addition, if lenders reach at-risk borrowers before they miss a payment and modifies the loans, the lender would be eligible for additional incentive payments. Critics say lenders don’t need the extra government handout because they will already benefit from a loan modification.

Where can I get more information?

There are two very good websites:

Financialstability.gov

Makinghomeaffordable.gov