As you’ve most certainly heard by now (news travels fast these days!), the Obama administration on Wednesday formally announced the details of its plan to help save American homeowners.  But what does the plan mean for you — a current, or prospective, homeowner?  Read on to find out. . .

The “Making Home Affordable” Plan is a $75 billion attempt to stem the tide of foreclosures sweeping across the nation.  The plan is divided into two parts — what’s been called the “Loan Refinancing” Plan and the “Loan Modification” Plan.

Loan Refinancing Plan

What it is: The loan refinancing plan is designed to help as many as five million homeowners who would like to refinance their mortgage (to make it more affordable, for example).

Who it’s designed to help: This part of the plan is for homeowners who want to refinance but haven’t been able to because the value of the home, in comparison to the amount of the mortgage — called the loan-to-value ratio, has fallen.  An estimated 30% of homeowners in Arizona are underwater — meaning they owe more than their homes are worth, which makes refinancing without help from a plan like this nearly impossible.

How to qualify: To qualify for a mortgage refinance under the new plan, a homeowner must meet the following criteria (outlined by the New York Times):

  • Your mortgage must be owned or backed by Fannie Mae or Freddie Mac.  Call your mortgage servicer to find out if your loan qualifies.
  • You will need to have enough income to make the new payments, and a solid payment history on your existing mortgage. So the jobless are also unlikely to qualify.
  • Your new mortgage can’t exceed more than 105 percent of the property’s current market value. In other words, your loan can’t be more than 5 percent higher than your home’s current value.
  • If you have a second mortgage, you’re still eligible, but the refinancing only applies to your primary mortgage.  The lender on your second mortgage has to agree to remain in a “second position,” which means that if you declared bankruptcy, it would be less likely to be repaid.
  • The program is available now, and set to run through June 2010.

Loan Modification Plan

What it is: The loan modification part of the plan, the administration hopes, will help three to four million homeowners modify their existing loans to make them more affordable.

Who it’s designed to help: Broadly, this part of the plan is for homeowners who can no longer afford their monthly payments and are close to defaulting as well as those who have already deftauled (missted a payment) and are on the brink of foreclosure.

How to qualify: The plan is only going to help those who earn enough money to pay their modified loans. So the newly jobless may not get any relief. Nor will people who overextended themselves to such a degree that there’s no hope they’ll ever repay their loans.

To qualify for a loan modification under the new plan, a homeowner must meet the following criteria (outlined by the New York Times):

  • Your monthly housing payment (including principal, interest, real estate taxes and insurance) needs to exceed more than 31 percent of your gross monthly income.
  • If you have enough liquid assets to pay your mortgage at its existing level, you’re not eligible (no matter what your income). (Your retirement assets are not included in that equation.)
  • If your total debts, including your mortgage and any other revolving debt like credit cards, auto payments or student loans, are 55 percent or more of your gross income, you’ll need to work with a counselor who has been approved by the Department of Housing and Urban Development.
  • The program applies to loans taken out before Jan. 1, 2009, but modifications can be performed now through Dec. 31, 2012. You’ll only have one shot to modify your loan under the program.
  • People who have already modified their mortgages are still eligible, as long as they meet all of the other requirements.
  • You must also live in the home; real estate investors are not eligible.
  • Your loan amount must not exceed current Fannie Mae or Freddie Mac loan limits — $417,000 in Arizona.
  • There may be cases where a modification is not possible. Loans that have been packaged into a security, for example, and sold to an investor that is not owned or backed by a government-sponsored entity like Fannie Mae may fall into this category. About 17 percent of mortgages fit in this category, according to Inside Mortgage Finance.

If you think you may qualify for a mortgage refinance or loan modification under the new plan, contact your loan servicer.  You can also find more details on the plan, as well as links to local housing counselors, who can walk you through the steps necessary to pursue a modification, at http://financialstability.gov/makinghomeaffordable/.

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