About 240,000 borrowers of the estimated 2 million with adjustable-rate loans scheduled to reset in the next year already are eligible to refinance into a loan insured by the Federal Housing Administration (FHA) - roughly 80,000 of them are eligible because of the newly created FHASecure Act, which loosens FHA’s criteria for refinancing.
The FHA program has been geared toward home buyers and homeowners with weak credit. Lenders may be more willing to lend to a buyer with shaky credit when the FHA is insuring the loan.
Borrowers with FHA-insured loans - which they get from private lenders as they would any other mortgage - pay a small premium to the FHA every month. The FHA, in turn, uses those premiums to cover the lender in the event of foreclosure and requires lenders to pursue viable ways to help borrowers avoid foreclosure if they become delinquent.
If you are behind on payments by at least four months but no more than 12, the FHA may even make a one-time interest-free loan to you to make your account current with your lender.
It used to be you couldn’t refinance into an FHA loan if you’d been delinquent in your payments for any reason. But with the FHASecure Act, delinquent homeowners qualify for an FHA-insured refi if they have:
- A history of on-time payments for at least six months before their loans reset to higher rates
- Interest rates scheduled to reset between June 2005 and December 2009
- 3 percent equity in their home, or the cash equivalent
- A sustained history of employment
- Sufficient income to make their FHA-insured mortgage payment and all other obligations
The FHA will still insist that lenders verify borrowers’ income and ensure that their total debt payments don’t exceed 43 percent of their income or that their mortgage payment won’t exceed 31 percent of income. If those ratios are exceeded, the lender must explain how the homeowner can compensate for that.
For borrowers who qualify, an FHA refi can save them money. Even with the premiums FHA charges, an FHA-insured loan could save a borrower $100 or more a month for every $100,000 borrowed compared to the payments they’d owe under an adjustable-rate mortgage that readjusts upward by 3 percentage points.
And if the homeowner has an FHA-insured loan for five years and has built up 22 percent equity in the home, the borrower no longer needs to pay the premium.
Foreclosed borrowers may get tax break
For homeowners whose situations can’t be remedied with a refi, they may get tax relief if they end up facing foreclosure.
Currently, if you foreclose on your home and the bank forgives a portion of your mortgage debt which isn’t recovered by the sale of your home, that forgiven debt is treated as taxable income to you. President Bush has asked lawmakers to provide a temporary exemption from that rule.
Both Seiberg and Clint Stretch, managing principal of tax policy at Deloitte Tax LLP, think it’s likely lawmakers will pass that exemption this fall and make it retroactive so that homeowners who foreclosed in 2007 would be covered.
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