Foreclosures have struck communities across the country in the wake of the subprime meltdown and ensuing housing slowdown.
While the FHA continues to garner headlines as an increasingly attractive lending option for prospective homebuyers, one of the agency’s lesser known programs may hold the key to helping to rebuild neighborhoods nationwide.
Government loans are headed for a record year in 2009. The FHA’s traditional home loan program has grabbed significant market share in the last fiscal year. But its unique program for purchasing and refurbishing rehab properties is gaining momentum.
The FHA 203(k) program provides qualified borrowers with fixed-rate and adjustable-rate mortgage options, which can be used for buildings anywhere from one- to four-family in size. Down payments, like the traditional FHA loan, are as low as 3.5 percent. Generally, the FHA will set the loan amount based on what the agency thinks the home will be worth upon completion of all rehab work – that includes the actual costs of repair.
Buyers can even use the 203(k) program on structures that were torn down, provided there’s some semblance of foundation at the site. A 203(k) loan can be used to cover rehabilitation costs such as room additions, painting, building decks, and a host of other alterations. Other acceptable refurbishing includes:
Buyers can also take advantage of the FHA’s Energy Efficiency Mortgage program and finance into the mortgage the cost of significant efficiency improvements. There are specific values and dollar limits for the agency’s EEM program.
Underwriting standards can at times be stricter for 203(k) loans, although there are no income or credit score restrictions to qualify. In most cases, the rehab work must start within 30 days of closing, be complete within six months and be professional in nature.
The 203k program doesn’t cover things like luxury improvements, which homeowners have to pay for from their own pockets. To learn more about FHA 203k loans, visit the HUD website here.
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Loan modifications are complicated products. It does require some understanding about how they work and what options you have when trying to modify them. Two options homeowners have to protect their homes are loan modifications and FHA refinancing.
Contacting a qualified financial advisor is always a great idea if you are struggling to understand what your options really are. Remember however that often free help is better than paid consultants that can financially from decisions you make through commissions and kickbacks.
The Government is investing heavily in public (that means free) counseling offices that provide homeowners with the best options.
Whatever your choice is, it is a good idea to understand as much as you can about loan modifications and FHA refinancing. Understanding the basics of loan modification and refinance before you talk to a qualified consultant will help you make an educated decision based on his advice.
So which is best for you?
A loan modification or an FHA refinance. Which is best for you might very well depend on who insures your loan.
You need to ask your lender or service provider (not always the same) who insures your loan, Freddie Mac, Fannie Mae or the Federal Housing Administration (FHA). These insurers are authorized by congress to insure home loans. This allows banks to provide low interest rates to high risk borrowers which enables borrowers in trouble to still get a fair interest on their mortgage, modify or even refinance their home. If your mortgage is insured by Fannie, Freddie or FHA your lender is pretty much safe and should be happy to modify or refinance your home.
If your mortgage is insured by Freddie or Fannie then you should apply for Making Home Affordable mortgage aid. There is no real difference between the two of them, they are based more on the location of the borrower than any other significant factor.
If you are insured by FHA you are eligible for the Hope for Homeowners plan. These plans allow borrowers that previously did not qualify for loan modification or refinance to now be accepted, so even though you didn’t qualify in the past apply again and you might get a pleasant surprise.
Making Home Affordable loan modification plan is designed to reduce monthly payments and stabilize the expenses of borrowers in trouble until they can get a hold of their finances. It is very regulated and fine tuned to provide the specific results the administration is looking for. There are some clever incentives both for borrowers and lenders to encourage loan modifications and paying them on time.
If you are insured with FHA you cannot apply for a Making Home Affordable loan modification but there are other options, some of which are more flexible and can adapt better to your personal circumstances.
Visit a government counselor for free and ask for your best options. It is a good idea to check the website of the program you qualify for to be prepared for what paperwork you need.
Most importantly don’t trust your loan modification to a loan modification company without understanding what they are doing and the effects it will have on your home and credit score.
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