How does US Government help underwater and unemployed homeowners?

The US Government has announced a new plan on March 26, 2010 as an expansion of its home loan modification initiatives. This new plan will help unemployed homeowners reduce their mortgage payments to affordable levels for 3 to 6 months while they search for work. The plan will also help “underwater” homeowners cut their mortgage balance and refinance into FHA loans if they owe more than their houses are worth.

How can borrowers benefit by the balance reduction plan?

“Underwater” borrowers who owe more than 115% of their home value and are current on their home loan payments for more than 3 years can qualify for this home loan modification plan and refinance into FHA loans. Under this plan, the mortgage balance will be gradually reduced by 10% to 96.5 % of the current value of the house within a period of 3 years. The loan-to-value ratio of the new FHA loan must not exceed 97.75 % of the appraised value of the home. Apart from struggling borrowers, this plan will also benefit lenders as they will get incentives for cutting the home loan balances.

If borrowers are 60 days delinquent or more on their home loan payments, they will not be eligible for help under the principal reduction plan. However, they can apply for help under the Home Affordable Modification Program.

How does the plan help unemployed homeowners?

The Obama administration has designed a plan to provide temporary assistance to unemployed homeowners and help them keep their homes while they seek new employment. To qualify, the homeowner must occupy the home as a principal residence and the home loan balance should not be more than $729,000. Borrowers must submit evidence that he is currently receiving unemployment benefits and request temporary assistance within the first 90 days of loan delinquency. The lenders will contact all eligible homeowners after their homes are appraised.

One major drawback of the home loan modification plan for unemployed homeowners is that the reduced loan payment is not forgiven but deferred. As soon as a homeowner finds a job or after the six months of forbearance, he has to repay the unpaid amount.

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