If a principal reduction is what you hope to obtain, here are few things to consider:

1. The principal reduction alternative is available through the Home Affordable Refinance Program or HARP Program, which was created in 2009 to help homeowners on the verge of foreclosure stay in their homes by refinancing their mortgages. To qualify, a borrower must be enduring a financial hardship and have a monthly payment that exceeds 31 percent of their monthly income. Other eligibility requirements also apply.

2. The goal of the program is to reduce the borrower’s monthly payment to 31 percent or less of their monthly income. To accomplish this, the loan servicer will use different alternatives, beginning with interest reduction and loan term extensions. Principal reduction is usually only offered in situations in which the applicant is severely underwater. If the loan-to-value ratio exceeds 115 percent, then the lender must consider a principal reduction as a viable option for achieving a lower monthly payment for the borrower.

3. When a borrower successfully obtains a principal reduction, the current unpaid principal is divided into two separate amounts. One amount is the new interest bearing principal, the other amount is the PRA Forbearance amount. This amount is reduced to zero after a three-year period as long as the homeowner makes payments in full and on time. The government compensates the lender with an incentive payment between 6 percent and 21 percent of the principal amount reduced. The exact incentive amount depends on the amount of debt forgiven and the loan-to-value ratio of the mortgage.

4. Loans that are owned or guaranteed by Fannie Mae or Freddie Mac have previously been ineligible for principal reduction under the original rules of the program. Recently the Obama administration has instituted several changes to improve the HARP program  (now referred to as the HARP 2.0 Program) which are expected to be in effect sometime this summer. Included in the changes is a principal reduction option for loans owned by Fannie or Freddie. Check with your mortgage servicer to find out exactly when this option will be available. You can also contact a HUD-approved housing counselor for more information.

If you find yourself in this situation, there is somewhere to turn. Fortunately for those who need it, the Home Affordable Unemployment Program (UP) is available to help borrowers keep their home if they suddenly find themselves unemployed.

Sixty percent of unemployed Americans have been out of work for more than ninety days. In response to this harrowing statistic, the Obama administration unveiled new rules that require mortgage servicers to extend the previous unemployment forbearance period of three months to an entire year for FHA-insured loans. The extended forbearance period also applies to all servicers participating in the Making Home Affordable program. Forbearance is a special agreement between a lender and a borrower in which payments are temporarily reduced or postponed.

That means if you have lost your job, you won’t necessarily lose your home if you cannot find work right away. The UP program is a vital safety net for many impacted by the lingering effects of the most recent economic downturn.  If you have lost your job do not hesitate to contact your lender to begin the forbearance process right away. Depending on your financial situation you can reduce your mortgage payment to less than 31 percent of your income, or in extreme cases you may be able to suspend your payment for 12 months or more.  Servicers may require that applicants receive unemployment benefits to be considered for UP.

These changes seek to expand the needed assistance and stability for the unemployed while they get back on their feet. Similar assistance is also available to those who are seriously delinquent on their loans, even if they are still employed.

Once a borrower is approved for UP, the forbearance will remain in effect unless they abandon the property, advise the lend they are no longer seeking employment, allow a forbearance payment to become more than 60 days past due, or until they find a job and are able to resume regular payments. At the end of the forbearance period, lenders are required to evaluate whether the borrower is eligible for any further assistance, which could include extended forbearance.

Keep in mind that borrowers whose loans are held by Fannie Mae or Freddie Mac do not qualify for UP, however Fannie and Freddie offer their own forbearance programs for unemployed homeowners. Also, as with many Making Home Affordable programs, to qualify for UP you must occupy the home as your primary residence and your mortgage must have been obtained prior to January 1, 2009.

Although you might feel lost in such a nightmarish scenario, do not hesitate to contact your lender for help. The UP program may just offer the support you need.

Below is a rundown of the most important things to know about what is being called HARP 2.0:

With Harp 2.0, borrowers can pick their lender.

It has been rumored that some financial mortgage lenders and financial mortgage portfolio lenders are counseling their portfolio customers that the HARP program can only be done through their current lender. This rumor is false. Any person who has their mortgage through Fannie Mae, and their current home value is lower then what they owe on the home, can refinance their home through a lender of their choice. They do not have to refinance their home through their current lender. This program is consistent in its guidelines from Fannie Mae and Freddie Mac, but the interest rates offered will differ from lender to lender.

Those that didn’t qualify before, might now.

Under previous rules, a homeowner had to have a mortgage that did not exceed a loan-to-value ratio of 125 percent. For example someone who owed $125,000 on their mortgage, but their house was only worth $100,000 would still qualify. As of last December, that ceiling has been removed to open the program up to those who are even deeper underwater. However, the relaxed rules only apply to those borrowers with traditional 30-year or 15-year fixed-rate loans. Those with fixed-rate loans longer than 30 years or adjustable rate mortgages must not have a loan-to-value ratio not exceeding 105 percent to qualify.

Delinquent borrowers are not eligible.

HARP is intended for those homeowners that have been responsible in making payments, but whose homes have fallen in value through no fault of their own. To be eligible, a borrower must not have had a late payment for six months, and are only allowed to have been late once during the previous seven to 12 months. The program does not expire until December 2013, so there is time for those that have fallen behind to get their affairs in order and meet the eligibility requirements.

Pay it off faster.

With interest rates at historic lows, HARP enables qualifying borrowers to reduce the term of their mortgage without increasing their monthly payment. Interest rates are usually less for shorter-term mortgages, so an eligible homeowner can refinance through HARP from a 30-year to a 20-year or 15-year mortgage and end up with about the same monthly payment, if not slightly less. The new rules make this even more attainable by eliminating risk-based fees previously imposed on borrowers that refinanced into shorter terms.

Less red tape.

With the recent changes, banks will require less documentation and underwriting to approve refinancing for interested borrowers. That is because one of the most important changes to HARP is that it eliminates the risk that lenders would have to buy back mortgages that go into default. Because banks could be on the hook for refinances that went bad, they required stringent appraisals and a closer examination of the applicant’s finances. With the new rules, banks are no longer exposed to that risk and are expected to put up fewer roadblocks to consumers.

Expect delays.

Homeowners who qualify under the new rules are encouraged to apply now if they need to, but there may be a wait. Fannie Mae and Freddie Mac have to update their automated loan approval systems that are still programmed to operate under the old rules. Banks and other lenders also must take the time to implement the new rules, but some have begun taking applications including Wells Fargo and JP Morgan Chase. Meanwhile, Bank of America has been asking customers to wait 90 days before filing an application.

Head on over to our HARP section to learn more how the program can help!

For the borrower, the FHA loan is a paperwork-intensive loan, but in most situations additional paperwork is nominal compared to the value of the loan itself. The pro’s to the FHA loan: High Loan-to-values (LTV’s) up to 97%, higher qualification ratio’s (NOTE: qualification ratios are your fixed monthly expenses divided by your gross monthly income.), lower interest rates and lower credit score requirements.

The FHA loan is great for first time home buyers for the mere purpose of the stringent guideline requirements. These requirements really help the borrower with insuring the home they are purchasing is valued properly and growing income allows the borrower to finance more of the home’s value the conventional programs allow.

With the real-estate market decline in late 2006 FHA loans have reemerged as a key form of financing for American home-owners and first time home buyers. Each state has specific FHA loan limits. For more information, please feel free to contact us by clicking here, email us at amdirect@alliedmg.com or call: (800)862.5543.

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