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FHA Offers New Modification Option

by Peter G. Miller
August 3rd, 2009

Maybe the third time will be the charm.

So far the FHA has been involved with two loan modification schemes, neither of which went anywhere. First there was the much talked-about FHASecure effort, a program originally intended to allow delinquent conventional borrowers to refinance with FHA mortgages. While the related PR was huge and intensive, it was also misleading. Despite HUD claims that “FHASecure has helped more than 100,000 families stay in their homes, the truth was different. In real life only about 3,800 delinquent conventional borrowers were helped in fiscal 2008.

Why the huge difference in numbers? Very simple: FHA changed the definition of the FHASecure program. Instead of being designed to help distressed borrowers it was now said to include everyone who refinanced with an FHA mortgage.

Next we have the Hope For Homeowners program. Again lots of PR. The results as of June 30th for the program look like this: There have been 949 loan applications but only ONE loan.

The New Program

So now we have something new. The FHA has come out with a program to help distressed FHA borrowers. The way it works is this:

___ An FHA loan is refinanced and 30 percent of the total is placed into an interest-free second loan that gets repaid when the property is sold or refinanced.

___ Borrowers can qualify with ratios of 31/55. The first ratio says that up to 31 percent of the individual’s monthly income can be used for housing costs and that 55 percent can be used for housing costs plus other monthly debts.

___ The borrower must be seriously distressed with an income change that is likely to be long-term. Think of a loss of income, onset of an illness, death of a spouse, etc.

How It Works

How do FHA loans for people with bad credit really work?

The first step is that you have to contact your FHA lender. You will be asked to complete a hardship affidavit.

The lender will then review your circumstances to see if you qualify. To protect your interest have paperwork you can use to justify your situation.

If you qualify the next step is a three-month trial with the new and lower mortgage payments.

So far, so good. Here’s the problem. If you miss one of those three monthly payments required during the trial period you’ll be booted out of the program. As the FHA explains, “If the mortgagor does not successfully complete the trial payment plan by making the three payments on time,” says HUD, “the mortgagor is no longer eligible for FHA-HAMP.”

In other words, you can’t be late and you can’t miss a payment. No excuses and no exceptions. Fail to make one of those three required payments and you’re not only out of the program but you can pretty much bet that foreclosure looms ahead.

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