Unemployment, 9.7% FHA Default, 9.12% Coincidence?

by Gina Pogol
February 11th, 2010

It doesn’t take a genius to see that unemployment and mortgage foreclosure go hand in hand, and today’s FHA default ratio and the unemployment rate bear this out. In addition, it stands to reason that homeowners who have insufficient resources to save up big down payments probably don’t have the funds to ride out months of drastically-reduced income. However, if you have an FHA mortgage, you do have access to help if you lose your job.
FHA-HAMP is the guvvie version of Making Home Affordable’s modification program. It differs from the original HAMP in several ways. First, you have to be in default on your mortgage — HUD defines default as at least 31 days behind on your mortgage. However, you can’t be more than 12 months behind. Second, there is no Net Present Value (NPV) test. An NPV test involves calculating if the lender’s cash flow will be better with a modification or foreclosure, and if modification is less profitable, you lose — the lender gets to foreclose. So the fact that FHA HAMP doesn’t impose this requirement is a biggie. Third, you can add another borrower to the FHA mortgage — so if you’re unemployed and can get someone to be on your mortgage with you, their income can be used to qualify for your modification. Finally, FHA-HAMP doesn’t get you a 2% interest rate like regular HAMP does. But you still get a lower payment.

How Does FHA-HAMP Reduce Your Mortgage Payment?
FHA-HAMP reduces your mortgage payments by using a partial claim, that is, using your mortgage insurance to bring your mortgage current and then reduce the principal balance a maximum of 30%. This amount has to be repaid eventually, but not until your mortgage has been paid off. It works like this:

Borrowers have a $200,000 FHA Mortgage with a payment of $1,200 a month, plus taxes and insurance of $300 per month. At the time they bought their home, both were working and earned a total of $5,000 a month. Their housing expense took 30% of their gross income. However, one borrower lost a job, and with unemployment insurance, the household income is only $3,700 per month. The total house payment is now 41% of their before-tax income, and they are two months behind on their mortgage. To get the payment down to no more than 31% of their income, the total housing expense can’t exceed $1,147, a reduction of $353. So FHA-HAMP may offer them a partial claim, that is, reduce their principal balance up to $57,000 (30% of their loan less 2 months’ arrearages). Assuming that the market APR (interest rate including monthly mortgage insurance) is 5.5%, the borrowers could get a partial claim for $51,000, reducing their loan amount to $149,000 and their total payment to $1146 ($846 plus $300 taxes and insurance).

The Trial Modification: Don’t Blow It!
To determine if you should be offered a permanent modification, you will first have to make four payments on time under a trial modification. If you don’t manage that, you will not be given FHA-HAMP loan relief.

Other Help
FHA-HAMP is not the only help available for the unemployed. You may qualify for a special forbearance. Call your loan servicer or a HUD counselor for help the day you lose your job to see what your options are.

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This entry was posted on Thursday, February 11th, 2010 at 8:01 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “Unemployment, 9.7% FHA Default, 9.12% Coincidence?”

  1. Sharon Casey Says:

    How can I add my daughter who is working and lives in the house to my FHA Loan? Who do I contact?

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