I received this question yesterday from Larry, in response to my blog Want to Refinance Your Mortgage? Home Loan-to-Value Ratio May Climb to 125 percent. (I've edited the question a little for clarity.)
What options does someone whose mortgage is not owned or securitized by Freddie Mac or Fannie Mae have? I have a credit score of 800, little debt, and an adjustable rate mortgage (ARM) which has already adjusted once. Fortunately, my income is sufficient to carry us through a few more annual adjustments, but I was relly hoping to refinance into a 15-year fixed rate mortgage.
When I started the refi process, I realized that because of the economic environment as well as several foreclosures in our small neighborhood, we are a little upside down in our home. Our house value was appraised at $215,000 two years ago to $145,000 currently. We have been in this home for a little over 10 years and owe approximately $153,000 on the mortgage.
Do I have any options other than hoping inflation increases the value of my home (along with the interest rates to refinance it)?
Your loss of home equity is simply heartbreaking. You and millions of homeowners have woken up, through no fault of your own, and found a lifetime of savings has disappeared.
To your question: If you had a Fannie Mae or Freddie Mac loan, you'd qualify for a refinance under the new guidelines set forth under President Obama's Making Home Affordable plan
. Under the current rules, homeowners can refinance if their mortgage is 105 percent of what the home is currently worth. For you, that would mean having your home appraise out right at the $145,000 level. (Your $153,000 mortgage happens to be 105 percent of $145,000.) It's possible that you might have had to come to the closing table with a couple of thousand dollars in cash to make it work - but it would work.
Unfortunately, you have virtually no options if you don't have a Fannie Mae or Freddie Mac loan and if your home has no equity. While many lenders are working with the GSEs, it's all voluntary, and they can decide whether they want to follow the Obama plan or not.
Fannie Mae, Freddie Mac and FHA account for around 80 percent (or more) of all home loans. What's left are jumbo loans, and a small amount of VA and USDA rural loans, and maybe a handful of othr investors. The market for other sorts of financing, particularly the 100+ percent financing you seek, simply isn't available.
You might be able to refinance with an FHA loan if you can come up with 3.5 percent in cash to put down on your home. That may seem like throwing good money after bad, especially since home values may still be declining
in your neighborhood due to the foreclosures
. But if you can save on your monthly payment by exchanging your adjustable rate mortgage (ARM) for a fixed-rate mortgage, it might be the best move you can make at the moment.
Your primary problem is one that an increasing number of homeowners share: Your home is worth significantly less than the mortgage amount. This week's news that home values have fallen further (although more slowly) is a bit of good news in that the housing crisis may be finally finding it's bottom. But clearly, millions of homeowners no longer fall into the prescribed 105 percent loan-to-value ratio for refinancing under the Obama plan.
That's why some in Washington, D.C. are starting to call for an expansion to the program. The number I heard bandied about while I was there recently is the 125 percent loan-to-value ratio I discussed in the blog last week.
Here's the thinking behind a 125 percent loan-to-value ratio expansion of the refinancing plan: If you had 10 percent or even 20 percent equity in your home, and your property values have fallen 40 to 50 percent from the high point, you'll still qualify to refinance under a plan that lets you get a mortgage even if your current loan is up to 125 percent of your home's value.
That won't help you, since your loan isn't owned by Fannie Mae and Freddie Mac, but I know many other readers will find it helpful. (If you don't know whether your loan is owned, serviced or securitized by Fannie Mae or Freddie Mac, visit MakingHomeAffordable.gov
to find out.)
What should you do now? I'd talk to a few lenders and see if you qualify for an FHA loan. If that doesn't work, I'm going to hope that when the housing crisis finally turns around, your home's value does as well.
Does anyone else have any other suggestions for Larry and the hundreds of thousands of folks who are currently walking the same mile?