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How to Qualify for Government Mortgage Assistance

In an attempt to control a foreclosure problem never lacking in sad statistics--one in 12 American homeowners is now delinquent on a mortgage payment, for example, according to the Mortgage Bankers Association--the U.S. government has announced several major mortgage assistance programs.

The problem is that almost nobody seems to know what the details on these programs are, who qualifies and who doesn't, why or why not, and, generally speaking, which end is up.

If that sounds familiar, read on for some clear, concise answers. 

Refinance or Loan Modification? Pick One

Mortgage government assistance programs come in two basic forms: help with refinancing a mortgage and help with modifying a mortgage. Both of these options can result in significant cost savings and can even save certain homeowners from foreclosure. But both options are not available to the same case.

You must choose one.

Government Assistance With Refinancing a Mortgage

Government assistance with refinancing, operating under the name "Home Affordable Refinance Program (HARP)," aims to enable "underwater" homeowners to qualify to refinance at today's low interest rates. Underwater means that you owe more on your mortgage than your house is worth, a problem now affecting almost 20 percent of U.S. homeowners. FHA loans made with low down payments, for instance, are often underwater because home prices have declined so broadly.

Under this program, the government guarantees the lender that a refinanced mortgage will get paid in full (if not by the borrower, then by the government), and in exchange the lender allows the borrower to refinance up to the full amount of the value of the house, and even beyond that, rather than imposing the usual 20 percent equity requirement.

This can be a big deal, because average interest rates last year were 6.1 percent, and right now they're 4.91 percent. Use our free mortgage calculator to see what a difference a point or two of interest makes per month.

However, there are catches. You can only refinance a mortgage up to 105 percent of a home's value. Also note: this program only works for loans owned by Freddie Mac or Fannie Mae, and you must have made your last 12 payments on time.  For help, make liberal use of our free loan calculators to crunch the hard numbers on your particular situation.

Government Assistance With Modifying a Mortgage

The "Home Affordable Modification Program (HAMP)" is the other avenue. Modification is more suitable than refinancing for borrowers who simply do not have the income to qualify to refinance. For instance, in the case of a job loss or illness.

The Home Affordable Modification program places the government in a sort of "middleman" position, trying to induce the lender and the borrower to make a deal.

Ideally, the government wants borrowers to pay no more than 31 percent of their gross monthly income to housing expense, including mortgage, property taxes, homeowner's insurance, and homeowner's association fees.

In order to hit that number, the lender can allow the borrower to pay a reduced interest rate, as low as two percent. If that doesn't do the trick, the term of the loan may be extended to as long as 40 years. Some lenders may even reduce the principal of a mortgage, but not lower than the home's value.

Try our mortgage calculator to see how going from a seven percent mortgage to a two percent mortgage would change your monthly payment amount. Such discounts make a huge difference, and do happen.

The government, for its part, gives some money to the lender who gives that discount, and gives some money to the borrower who makes the new payment according the terms of the new agreement ($1,000 per year).

Mortgage modification is only available if you live in your home. You must participate in a three month trial period, too, before any permanent modification will be approved.

Get Your Paperwork Together, Know Names and Phone Numbers

There has been so much talk about these programs, and the foreclosure problem is so severe, that mortgage professionals are being overwhelmed with messy paperwork and even messier stories. Set yourself apart by assembling pertinent paperwork into a nice, neat, easy on the eyes package. To either refinance or modify your troubled mortgage, you will likely need:

  • Income verification documents: pay stubs, W-2s, 1099s, etc.
  • Tax returns for the last three years.
  • A letter explaining why you need help with your mortgage.
  • Accurate information on all debts, including credit cards, student loans, auto loans, and home equity loans.

Call your lender, turn in your package, and obtain a name and phone number for a contact person. Realize that, while government assistance makes mortgage help more possible, it's you and your lender who need to talk.



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