In my last article, I covered loan modifications as a potential strategy for foreclosure avoidance. And, although the process has improved slightly at some banks and servicing companies, the ratio of loan modification applications to successful completions remains dismal. I have spoken to several industry professionals and the biggest reasons I hear for modifications not getting approved is that borrowers make too much money or that their loan has not adjusted YET.
If a loan has not adjusted yet and there is no evidence of financial hardship, pursuing a loan modification in an exercise in futility. However, what if you are underwater and/or have a loan that will be adjusting next year or six months from now and you are nervous about what is to come? Fortunately, you may still be able to refinance if your existing loan is owned by Fannie Mae or Freddie Mac under either the Fannie Mae Refi Plus program or the Freddie Mac Open Access program, respectively.
Both of these programs allow for negative equity up to 125% loan to value (1st mortgage balance / property value) for fixed rates and 105% for adjustable rates, as long as your original principal balance on your current loan was 80% or less of the appraised value at the time (if you don’t currently have private mortgage insurance aka PMI, you are probably in good shape). These programs are also streamlined to some degree, typically only requiring a current pay stub and verification of employment for a salaried borrower or the most recent year’s tax returns for a self-employed borrower.
Even if you have an existing 2nd mortgage that puts you above the 125% threshold, you may still be eligible. The guidelines only apply to existing first mortgages and do not place a limitation on the combined loan to value (1st mortgage balance + 2nd mortgage balance / property value).
Here is an example (assumes 1st mortgage is owned by Fannie Mae or Freddie Mac):
Current Home Value: $400,000
Existing 1st Mortgage Balance: $440,000
Existing 2nd Mortgage Balance: $75,000
Loan to Value: ($440,000 / $400,000) = 110%
Combined Loan to Value: ($515,000 / $400,000) = 128%
So, as you can see, our combined loan to value is beyond the 125% threshold but it does not matter since our 1st mortgage loan to value is only 110%. So, as long as the existing 2nd mortgage lien holder will subordinate to the new proposed 1st, we would be eligible to refinance under Fannie Mae / Freddie Mac guidelines.
If you would like to see if your loan is owned by Fannie Mae or Freddie Mac, you may click on the links below.
For any other questions, you may contact Matthew Carreon at firstname.lastname@example.org