If you’ve been struggling to pay a mortgage loan backed by Fannie Mae or Freddie Mac, relief may soon be on the way. The Federal Housing Finance Agency (FHFA) recently announced that it would roll out its Principal Reduction Modification program for qualifying homeowners. This initiative is aimed at helping homeowners who ended up underwater following the housing crisis. Here’s what you need to know about how this new program works.
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Who Can Get Help?
The FHFA has some specific guidelines in place that decide who’s eligible to have their loans modified and some of their mortgage debt forgiven. To get help, your mortgage must be delinquent for at least 90 days (as of March 2016) and the total outstanding balance that’s due can’t exceed $250,000. When Fannie Mae or Freddie Mac evaluate you, the value of any unpaid mortgage-related expenses (including taxes, insurance and interest) has to equal or exceed 115% of your house’s value.
You’re not disqualified if you’ve previously modified your mortgage loan, unless you’ve gotten more than three loan modifications. If you’re facing a foreclosure proceeding, you won’t qualify if your pending home sale is set to take place within 60 days of the date Fannie Mae or Freddie Mac evaluate the property (or within 30 days if your state allows non-judicial foreclosures).
Homeowners should note that this program only covers owner-occupied homes and individuals paying off conventional mortgage loans. So if you’re upside down on an investment property, you won’t be able to get relief via a principal reduction modification.
Related Article: What You Should Know About Fannie Mae Loans
How Much of the Principal Will Be Reduced?
Fannie Mae and Freddie Mac are closely following the rules for their Streamlined Modifications in determining how much of a homeowner’s principal mortgage debt can be forgiven under the new program. If they opt in to the forgiveness portion of the program, underwater homeowners can have 30% of their post-modified unpaid principal forgiven or 115% of their post-modified mark-to-market loan-to-value ratio (what they owe on their mortgages relative to the current market value of their homes) forgiven, whichever is lower. If homeowners don’t opt in to the forgiveness portion of the program, a percentage of the principal can be placed into forbearance, meaning that it’s not due until the loan matures.
Borrowers who meet the aforementioned criteria can also have their mortgage rates adjusted down to the current market rate and extend their loan repayment period to 40 years.
If you’re interested in the FHFA’s principal reduction program, you’ll need to consider how it might affect your tax situation. If part of your unpaid mortgage debt is forgiven, it may count as taxable income. If you want to play it safe and avoid a higher tax bill, you can always opt out of principal forgiveness.
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How Long Will the Program Be in Effect?
Beginning October 15, 2016, loan servicers must begin contacting eligible homeowners about the Principal Reduction Modification program. They have until December 31, 2016 to do so, which means homeowners have a very narrow window to apply for a principal reduction. The FHFA estimates that approximately 33,000 homeowners will qualify. But the actual number of individuals who use the program could be much lower.
What Homeowners Should Do Now
If you’re struggling to stay on top of your mortgage payments and you want to avoid foreclosure, a principal reduction may be worth considering. While your lender can’t actively offer you a reduction until October, you may be able to ask your lender whether you’ve got a shot at qualifying. Just remember to think about how taking a reduction could potentially affect your tax bill.
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