New government-assistance programs are available for mortgage refinance or loan modification, but there are restrictions and caveats involved. If you have a troublesome loan, this is the time to research your options and find out if you qualify for government assistance.

The government has begun to clarify its major new foreclosure prevention initiatives, including a $75 billion effort called the Homeowner Affordability and Stability Plan. As news of the programs emerge, most American homeowners wonder if they'll qualify to be among the nine million mortgage holders who get helped by mortgage refinance or loan modification strategies.

Government assistance

President Obama's approach is essentially two-pronged. A major component of it involves helping the homeowner do a mortgage refinance to affordable interest rates, through a government-assistance program that pays down the rate on behalf of borrowers. The other strategy includes cash incentives paid to lenders who agree to rework mortgages. Loan modifications that lenders and bankers might do include such steps as reduction of principal, lowering of rates, longer amortization schedules, or a combination of all three tactics to keep borrowers current on their payments.

Mortgage refinance rules

The official list of guidelines related to the Obama government assistance plan is scheduled for public release this week, but homeowners can begin to determine whether or not they quality for help by considering several important factors. Those hoping to do a government-assisted refinance will need to have at least 20 percent equity in their home, and most loans will have to be owned or insured by Fannie Mae and Freddie Mac. Some exceptions may be made for those who have FHA-backed mortgages, but those who have jumbo mortgages will not be included in the rescue plan. Jumbos typically include any loan above $417,000.

Borrowers will also have to prove that they have sufficient income to make their loan payments after getting a loan modification, but how that will be verified has yet to be explained. The big obstacle for most consumers will be the ratio of debt to home value, because those who are seriously underwater on their mortgages will be disqualified. That means that homes whose values have plummeted in relationship to what is still owed on the mortgage will probably be out of luck regarding government assistance.

Heavy debt not necessarily a problem

Many consumers have other non-real estate obligations such as car loans and credit card balances. Despite carrying heavy debts, they may still be able to qualify for a loan modification. They'll have to take a HUD-certified debt counseling class, but that's a small price to pay for saving one's home from foreclosure.

People who bought homes only for speculative purposes won't qualify for government assistance. Professional investors, for instance, who bought properties in order to convert them into rental units, won't be allowed to participate in any of the Obama-supported rescue programs, either. Only owner-occupied residences will be included in these refinance and loan modification efforts, and most American taxpayers strongly agree with that policy.

Published on March 31, 2009