Many Americans face the same financial difficulties you face. Many borrowers with less than perfect credit took out sub-prime loans that had a fixed interest rate for a few years, then were set to adjust.
These loans were sold to you and others with the assurance that it would be easy to refinance. Often, borrowers were told that paying on the loan for the first few years would be a 'band-aid' that would help improve their credit to the point that the next refinance loan would be a prime loan at the lowest interest rates available.
What Goes Up Must Come Down
Unfortunately, another assumption that was not discussed much was that home values would keep rising. After all, they had been going steadily upward for years. Instead, home values have plummeted, leaving many borrowers owing more on their homes than the homes are worth, and finding out that refinancing without equity is a big problem.
Refinancing without equity is very difficult. Few lenders offer loans above 90% of your home's current, fair-market value. Theoretically, one could pay down the loan balance, but who has that kind of money? The credit market has tightened up. The days of 100% refinancing have disappeared, even for borrowers with excellent credit and strong income. Most lenders will not lend more than 90% on a refinance loan and some cap the loan amount at 85% or 80% of your home's value.
There are a few options for borrowers who seek refinancing without equity:
- FHA loans- FHA loans are available for 96.5% of your home's value. FHA loan amounts are limited to a certain dollar amount, based on the county in which you live and the FHA loan limits are set to adjust downward in October, 2011. If you have no equity, but are not underwater, you may be able to come up with 3.5% of your home's value, in order to meet the FHA loan-to-value requirements.
- Refi Plus- If your loan is owned by Fannie Mae or Freddie Mac, the Refi Plus program rules allow you refinance your loan up to 125% of your home's value. However, research we have done at Bills.com has only found lenders who are willing to loan up to 105% of your home's value. Still, 105% is refinancing without equity. If you want to know if your loan is owned by Fannie Mae or Freddie Mac, you can look it up online.
- FHA Short Refinance- In order to get an FHA Short Refi, your lender has to agree to reduce your mortgage's principal balance by at least 10%. If your lender does this and you can find another lender willing to finance your loan, then the FHA will guarantee the loan. The biggest sticking point in this program is that lenders have been very reluctant to write down the principal balance. Essentially, few lenders are participating in the program.
If you are not able to refinance your loan, what steps you take depend a lot on whether or not you can afford to make your mortgage payment. If your income has dropped or if your loan payment adjusted upwards, when you can't make your mortgage payment, you are left with only a few options, none of them excellent.
- Loan modification- You can try to work with your lender to modify the terms of your loan. The federal government has introduced programs, HAMP and HAFA, that have not succeeded in helping a vast number of borrowers. There many stories from borrowers who feel that they were stuck in some kind of Alice in Wonderland world, when trying to work out a loan modification. Someone at the lender's office says that no modification won't be considered without the borrower being a few months behind on the mortgage. When the borrower stops making payments, in order to get the modification, the lender starts foreclosure proceedings!
- Short Sale- A short sale is when you sell your home and your lender agrees to accept less than you owe on the balance of your loan. It generally requires that you prove to your lender that you are unable to meet your obligations by making a full financial disclosure. You may or may not end up responsible for the difference between what your home sells for and what you owe on your loan, which is called the deficiency balance.
- Deed-in-Lieu of Foreclosure- In a a deed-in-lieu of foreclosure, you give the property to your lender voluntarily and the lender agrees to cancel the loan. In a deed-in-lieu, the lender agrees to not initiate a foreclosure or to stop any foreclosure proceeding that have begun. It is the lender's choice whether or not to forgive the deficiency balance.
Please read the Bills.com article that compares a short sale to a deed-in-lieu, for more information, including a discussion of the potential tax liabilities you may face.
If you can't work out a solution with your lender, you may need to consider allowing the home to go into foreclosure and then filing for bankruptcy protection, to protect yourself from collections for any deficiency balance that remains.
Before you allow your home to go into foreclosure, you should consult with an attorney in your area, to make sure you understand all the potential consequences of a foreclosure and what steps you can take to best protect yourself from those consequences. In some states, loans that were used to finance the purchase of a home are non-recourse loans. This means that the lender has no recourse to come after you for any deficiency balance. Whether your loan is a recourse loan, where the lender can come after you for the deficiency balance, or a non-recourse loan will play a big part in the choice you make.
I wish you the best of luck in finding a refinance loan that meets your needs or working out a the best solution you can.
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