Refinancing With an FHA Mortgage to Avoid Foreclosure

After the lack of success with the Home Affordable Modification program, the Obama Administration has decided to implement a new plan. With only 170,000 homeowners out of 1.1 million completing the HAMP program, the Administration had to find a new strategy to combat the mounting number of foreclosures in the U.S. With this plan, the goal is to help struggling homeowners pay their mortgages and prevent foreclosures by refinancing with FHA mortgages.

How the New Program Will Work

This program was designed to aid homeowners with underwater mortgages and unemployed homeowners who need assistance making their mortgage payments. Approximately 1 out of 3 homeowners have underwater mortgages, which means they owe more than their homes are worth. Economist Mark Zandi estimates that about 4.5 million homeowners have homes that are in foreclosure or have mortgage payments that are at least 90 days delinquent. Add unemployment to the mix and this issue becomes even more problematic as homeowners struggle to pay their mortgages with less income.

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Homeowners do not have to have an FHA mortgage to participate in the program, but they will be required to refinance their current mortgage with an FHA mortgage. A homeowner must owe at least 15% more than the value of his or her home in order to qualify for the program. Homeowners must also be current on their mortgages, which cannot have a balance higher than $729,750, and their credit scores cannot be lower than 500.

Unemployed homeowners can have their mortgage payments lowered to 31% of their monthly incomes (at the most) for three to six months. To do this, they must show proof of their unemployment benefits, and they cannot have more than three missed mortgage payments. Their loans also must have been originated before January 1, 2009.

In order to qualify for this refinance, the homeowner must get his or her principal balance reduced by at least 10%. Incentives (specifics are unknown at this time) will be offered to mortgage lenders to encourage them to reduce borrowers' principal balances.

What the Program Hopes to Accomplish

This program will be financed with $14 billion of the Troubled Asset Relief Program funds. Not all homeowners in danger of foreclosure will qualify, including homeowners who took on mortgages beyond their financial means. While not everyone can be helped, the program is intended to help about three to four million homeowners avoid foreclosure on their homes. Lowering the percentage of home foreclosures could prevent home prices from decreasing further and be a start toward rebuilding the housing market in this troubled economy.

Some wonder if using FHA-backed mortgages to refinance troubled mortgages is the best answer to prevent foreclosure. The FHA program is already struggling, as made evident by its announcement of the upcoming increases to the down payment and mortgage insurance requirements. Taking on more troubled mortgages could hurt the program more, but only time will tell. For struggling homeowners, this could be the best solution to help them manage their debt. Hopefully, this version of the program will have more success than its predecessor.

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