Senate passed the Housing Rescue Bill on Saturday, which will provide $300 billion to rescue homeowners that are facing foreclosure. President Bush is expected to sign the bill in the next few days and then it will go into effect on October 1st.
So what does it mean to homeowners? Homeowners who can no longer afford their mortgage payments and who are facing foreclosure will have to ability to refinance out of their current loan and into a new low-cost fixed-rate loan. The new loan will be insured by the Federal Housing Administration (FHA).
Do you qualify? Not everyone will be eligible to participate in the program, homeowners that are frustrated because the value of their home is down but can still afford their payments will not be considered for the program. In fact, it will be a requirement to prove that borrowers can no longer afford their current monthly payments. Homeowners also must be currently living in the home and they must be spending at least 31% of their total gross income on their mortgages to be eligible.
So how does it work? To start, borrowers will need to get in touch with an approved FHA Lender to get started on the refinance process. The banks will order an appraisal to determine the homes value and to find out how much the original lender will have to write down. FHA will only lend up to 90% of the homes value, so if you paid $500,000 for your home and it's now worth $300,000, the original lender must agree to erase the $230,000 difference. The banks will be looking at ever file on a case by case basis to decide if it's writing down the loss is less costly than foreclosing and paying the enormous fees that come along with it. The banks will be especially cautious in high cost areas such as the San Diego real estate market where some San Diego home values have dropped as much as 40% in some areas.
Of course, none of this comes at no cost. With FHA financing, homeowners are required to pay an additional 1.5% of the total new principle annually for mortgage insurance. Homeowners must also agree to share any future profits with FHA, plus a 3% exit fee. How much you must share with FHA is all dependent on when you sell your home. It's based on a tier system that reduces how much you must share over 5 years, where it stays at 50%. So if you sell within one year and make a profit, FHA would be entitled to 100% of it. But, if you sell or refinance in 5 years or later, then FHA would get a 50% share of the profits.
This is a great program for those facing foreclosure here in San Diego County, because it allows homeowners to reduce their mortgage and lock in a fixed rate over a long period of time and not to mention, stay in their homes. If signed, this bill will vastly reduce the number of short sale homes listed for sale as well as the number of foreclosures.