With the real estate market tanking and the current economy in recession, home values are decreasing drastically. With financial institutions dropping the maximum loan-to-value (LTV) ratio, refinancing options have become even more limited.
Interest rates are extremely competitive and low, so how can homeowners take advantage of refinancing options without the mandatory 20% equity that most lenders require?
Refinancing with Less Equity
There are two options available from the federal government for refinancing a home that require just 5% equity or no equity whatsoever, the FHA (Federal Housing Administration) loan and a VA (the US Department of Veterans Affairs) loan.
FHA loans have a maximum loan amount dictated by a region’s average home values. The down payment however boasts a sweet 3-5% depending upon what the house appraises for, or the purchase price, (the lower of the two values).
While there are no income limits, the debt to income ratio has to be decent and credit score, while not having to be perfect, does have to be relatively good. An FHA loan is a little different from other loans in that it guarantees against default, which makes it attractive to lenders and allows potential homeowners to qualify for a loan more readily.
To qualify for a VA loan, there must have been time served in the military, either currently serving or as a retired veteran. Loan eligibility is based upon years of service and a VA loan can be a rock solid option in stormy seas of recession. Once approved, VA loans never change, rates remain constant and the option to refinance to a lower rate is always available.
Homeowners looking to refinance can take advantage of the Non-VA – to VA Loan Refinance program. There is no mortgage insurance required, little to no out-of-pocket expenses and payments can be lowered dramatically. Qualification is also more flexible than an FHA loan and approval requirements are not as stringent as conventional loans.
Negative Equity Refinance Options
Negative equity homeowners or “underwater” borrowers were urged to take advantage of the government’s Home Affordable Refinance Program (HARP). Although the program runs until June 2010, the application deadline expired in January 2010. Homeowners however, can still apply for the Loan Modification program.
This program, which runs until December 31, 2012, allows homeowners to modify an existing loan one time. Those struggling to meet or make a monthly payment on a mortgage may qualify for the loan modification program, which allows people to adapt a mortgage, essentially averting home foreclosure.
Unfortunately, the government program has been seen to have several flaws; one of which is the process itself may be too complicated. On February 17, 2010, the Treasury Department stated that figures in January reflected that 116,000 homeowners actually received a permanent loan modification. It sounds decent until it is compared with 1 million homeowners applications. The Arizona Republic, “Federal lifeline, well-intended, failing miserably.” March 11, 2010.
The Government’s New Short Sale Program
The government’s new short-sale program, will allow owners to sell for less than what is owed. The program takes effect on April 5, 2010 and compels banks to accept the arrangement, in essence, forgiving the difference between the loan amount and what the property actually sells for.
The government hopes that by offering incentives to both homeowners and banks, all parties will step up to the table and negotiate.This new Home Affordable Foreclosure Alternative program is aimed at borrowers that are ineligible for the mortgage modification program. The program will run until Dec. 31, 2012.
To qualify for the short sale program:
- The home must be a primary residence
- Only a first mortgage qualifies
- The loan must have originated before Jan. 1, 2009
- The mortgage payment must exceed 31% of a borrower’s income
- The maximum owed is capped at a little over $700,000
Experts are still on the fence about the new program, although there does seem to be more confidence that this program might work better than the previous ones. See, “Government urges short sales, but experts aren't sure they will help." Heavens, Alan J. The Philadelphia Inquirer. March 11, 2010.
Of course, the program does nothing to allow a borrower to keep the home, but it does provide assistance for relocation. Only time will tell how effective this program will be.
Sources:
Freedman, Robert "A Much-Needed Road Map." RealtorMag Feb. 2010
FDIC Loan Modification Program Guide – "Mod in a Box" FDIC.gov Mar. 2009
Elizabeth Batt - Elizabeth Batt is a former large animal nurse, certified NREMT, lover of equines and conservationist.
Join the Conversation