It can be terrifying when a homeowner suffers a severe setback in income and is struggling to make payments on their existing mortgage. Miss a payment and the lender can begin the foreclosure regimen. There are options that include refinancing, loan modification, or receiving a 90-day forbearance. Owners who are not delinquent have the best options for refinancing their homes to a mortgage with affordable payments.
Reduced Income and Refinancing
All lenders want to know the borrower has sufficient income and, in some cases, ample reserves. Having a reduction in income is, in itself, not necessarily a barrier to refinancing. There are Fannie Mae or Freddie Mac programs for refinancing homes that are underwater and these typically have less stringent income requirements than other products. There are also state-supported home mortgage assistance programs. Some are planned for elimination at the end of next year, so it's not too soon to look at refinancing now, especially under HARP plans.
Along with income, lenders take a detailed look at the equity in the home and the applicant's debt-to-income ratio. The applicant's total income is balanced against housing costs (mortgage, insurance, taxes) and existing non-housing debt such as student loans and auto loans. In some cases, the original lender may look into refinancing or forbearance rather than enter the costly legal process for foreclosing. In any event, borrowers should let their original lenders know if making current payments is growing impossible. Homeowners who have a total debt greater than 55 percent of their income may be candidates for loan modifications.
HARP Refinancing Options
Income requirements for modifications and refinancing depend largely on existing debt and the existing interest rate. The Home Affordable Refinance Program (HARP) was created for borrowers who have very little equity in their homes. Currently there is no qualification for the amount the home is underwater. For those who can no longer make payments on an underwater home, HARP requires applicants to have a clear record with only one late payment allowed per year. The original loan must be guaranteed or owned by Freddie Mac or Fannie Mae and was closed on or before May 31, 2009.
Loan Modifications via HAMP
A Home Affordable Modification Program (HAMP) refinance can change the term or rate of a guaranteed Fannie Mae mortgage. Owners can change from an adjustable-rate mortgage to a fixed-rate loan, or change terms from 30 years to 40 years in an effort to create lower rates and payments. The rule of thumb is to refinance the home with monthly payments at no more than 31 percent of their pre-tax income. HAMP applicants must demonstrate financial hardship from loss of income or illness.
Homeowners can use LendingTree's Refinance Calculator to crunch the pertinent numbers.
Other Options to Refinance
For homeowners who may not qualify for a new mortgage, there are ways to temporarily raise funds to make payments that stave off foreclosure. There are Home Equity Lines of Credit (HELOCS) for those who can use their home as collateral. The line can make payments, but owners must remember that the HELOC must be paid back after the draw period. While exploring options, consumers would do well to consider debt consolidation and credit repair, if necessary.