Will My Mortgage Now Qualify For Refinancing Under The Obama Housing Plan?

This was a question I received based on an earlier article looking at the refinancing under current market conditions. With interest rates at historic lows, refinancing is a very attractive financial option that could save thousands of dollars on a standard mortgage. For example, by refinancing from a 6.75% rate to 5% rate on a $200,000 mortgage, could reduce monthly repayments by up to 17%!

Unfortunately for millions of Americans the savings from refinancing to a lower rate are out of their grasp because they do not qualify, thanks to the tighter eligibility criteria resulting from the credit crisis. Twenty percent equity stakes and 700+ credit scores are becoming the norm rather than the exception. While tighter criteria would have been prudent in preventing loans being made to irresponsible borrowers during the housing boom, it seems that the banking industry has gone to other extreme by making refinancing available to so few.

However Obama’s new $75 billion “Homeowner Affordability and Stability Plan” (housing) plan may provide the refinancing relief many responsible home owners were looking for. Here are the main provisions for refinancing under the plan:

1. Have a conforming loan backed by Fannie Mae (FNM) or Freddie Mac (FRE). Approximately 60% of single-family “conforming” loans are backed by Government controlled mortgage giants. These are the companies that buy the loans from your bank/servicer and then sell them to Wall Street. A conforming loan is one under $417,000 in many areas - or up to $729,500 in certain high-cost areas like San Francisco, Boston or Washington, DC. Most home owners will have no idea if their loan is “backed” by Fannie or Freddie, but your lender or servicer does. So call them and then ask about qualifying under Obama’s housing plan.

2. Your Loan to Value ratio can now be as high as 105%. Under current conditions you cannot refinance mortgages where the loan-to-value (LTV) ratio exceeds 80 percent without some form of credit insurance. That insurance can be difficult or impossible to obtain in parts of the country that insurers have labeled declining markets, with high risks of further deterioration in values. Under the Obama housing plan, the LTV has been raised to 105%, which means you qualify even if you owe between 80-105% of your mortgage. However it you are severely “underwater” and owe more than 105% of their home’s value you will not qualify and may have to wait for mortgage relief via other lender driven provisions in the housing plan.

More than 25% of home owners will qualify under the new refinancing criteria, but there are some restrictions to prevent abuse of these new provisions.

> The cutoff date for the program is June 10, 2010.

> No “cash outs” will be permitted. This means the new loan balance can total only the previous balance, plus settlement costs, insurance, property taxes and association fees.

> Loans that had mortgage insurance will likely continue to have coverage under the existing amounts and terms, thereby limiting Fannie and Freddie’s exposure to loss. But loans where borrowers originally made down payments of 20 percent or more will not require new insurance for the refinance, despite current LTVs over the 80 percent limit.

> Loans balances will not reduce. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.

Further eligibility and operational rules will be provided later this week.

In the meantime, if you think you will qualify you should start getting ready to start the refinancing process as soon as possible because there will be a huge rush of applicants. To prepare, start gathering the information that you will need to provide to your lender which includes:

- Information about the gross monthly income of all borrowers, including your most recent pay stubs if you receive them or documentation of income you receive from other sources.

- Your most recent income tax return

- Information about any second mortgage on the house

- Payments on each of your credit cards if you are carrying balances from month to month, and

- Payments on other loans such as student loans and car loans.

References : Washington Post;

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