MHA Refinace Limit Raised to 125 Percent

Many homeowners who are underwater on their mortgages now have a new option for reducing their monthly payments - refinancing under the government's Making Home Affordable Program.

Homeowners who owe as much as 125 percent of their property value on their current mortgage can now qualify for refinancing under the program, up from an original limit of 105 percent. The change, announced July 1 by the Obama Administration, opens up the program to a whole new group of borrowers whose homes lost value during the crash of the housing market.

"This decision is part of our ongoing efforts to maximize the effectiveness of the Making Home Affordable program and adapt to an ever-changing housing market," said Treasury Secretary Tim Geithner. "By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly. It's a crucial step in our broader efforts to get America's housing market and economy on the path to recovery."

Previous loan-to-value limit excluded many

The refinance option of MHA was designed to assist homeowners who need help, but had not yet fallen behind on their mortgages. However, the original loan-to-value limit of 105 percent meant that many such homeowners were unable to qualify, in a real estate market that had seen property values in many parts of the country decline from 20 percent to 40 percent over the past two years.

The change opens up the program to many of those homeowners, as well as to those who are not in financial difficulty but would like to reduce their mortgage payments on a property that has lost value. Previously, their options under the Making Home Affordable (MHA) Program were limited to a loan modification if they were more than slightly underwater on their mortgage, but lenders often declined to work with them, focusing instead on loan modifications for homeowners at imminent risk of foreclosure.

Available for Fannie Mae, Freddie Mac loans

To qualify for a MHA refinance, homeowners must have a mortgage that is owned or guaranteed by Fannie Mae or Freddie Mac (another option, called a streamline refinance, is available for homeowners with FHA or VA mortgages). They must be the owner-occupants of a one- to four-unit home and have been current on their mortgage payments for at least the past 12 months.

The severity of the declines in many housing markets means that some owners will still not be able to qualify in some housing markets. However, an initial down payment of 10 percent or more at the time of purchase, along with subsequent mortgage payments since then, should put homeowners in most markets within the 125 percent limit, unless they've heavily tapped their home equity.

May be able to cover second mortgage

Homeowners with a second mortgage on the property may be able to get both mortgages rolled into the MHA refinance, as long as the total principal on the two mortgages does not exceed 125 percent of the current market value on the property.

A variety of resources are available to help homeowners estimate how much their property values may have declined since the peak of the housing market. Local tax rolls commonly post sales prices of the properties listed; comparing sales prices on properties that changed hands more than once in the past few years can provide good gage to how property values are performing in your community. Be sure to account for the fact that foreclosed properties typically sell at a significant discount compared to traditional sales.

The Standard and Poors'/Case Shilling Home Price Indices, which tracks housing values in 20 major U.S. metropolitan markets, is another useful tool, although be aware that price changes can fluctuate significantly from neighborhood to neighborhood and in communities just outside the metro area. A variety of other online home prices surveys and automated estimation tools are available as well; comparing results from a number of them can provide a general idea of your current home value prior to paying for an assessment or other initial costs in applying for a mortgage refinance.