New rules aim to simplify refinancing for troubled homeowners
Susan Tompor/Detroit Free Press
10 November 2011 

If you are a troubled homeowner hoping to refinance, pay attention next Tuesday as details come out on a new federal program that could make it easier starting in late December or early in 2012. 

In the meantime, be sure you keep up with your mortgage payments so that you can qualify for the new deal. 

Even if you missed payments in the past, it can help to be current going forward, said Kathy Conley, housing specialist for GreenPath Debt Solutions in Farmington Hills. 

The revised Home Affordability Refinance Program could apply to a broader base of people. 

If, for instance, you owe $100,000 on a house that would appraise at just $50,000 -- too deep underwater for a conventional refinancing -- you might be able to refinance under the new HARP. That was not true under the old HARP, launched in 2009, which had a 125% maximum on loan-to-value ratio. 

The new plan is expected be a big help for many Michigan homeowners and others in states that have been hard hit by drastic drops in home values, such as Florida, California, Arizona and Nevada, according to Greg McBride, senior analyst for Bankrate.com. 

Seeing mortgage rates hover near record lows -- around 4.23% for a 30-year fixed and 3.48% for a 15-year -- has many folks wondering whether it's time to refinance. 

In this tough housing market, what do you need to know? How can you save money by refinancing and make those low rates work for you? 

Figure out how to refinance
Even with interest rates low and a revised federal program coming, refinancing is not for everybody who wants -- or needs -- a better deal on their home and some extra cash. 

Some homeowners could face surprising hurdles, even if they're not underwater and are current on payments.

"Everybody who is really hurting -- and everybody who needs the help -- can't take advantage of the rates," said Kip Kirkpatrick, CEO of Shore Mortgage Services in Birmingham.

What's your credit score? How solid is your income? Got a lot of debt? 

In Michigan, things aren't as bad now as in recent years when people were losing jobs at a dramatic pace during the auto industry meltdown. 

But not all industries have rebounded as well. Many people remain out of work, and many who are employed have taken pay cuts. 

To refinance, the borrower needs a predictable level of recurring income -- so such things as pension income would count, as would Social Security, your regular paychecks, alimony if expected to last three years or more, and interest on investments. 

"You will need to provide a full accounting of your income," said Bob Walters, chief economist for Quicken Loans in Detroit. 

Lenders are going to look at how much money you owe on the mortgage and other loans relative to what you're making. 

"A reduction in income can lead to a higher ratio of debt payments to monthly income," said Greg McBride, senior analyst for Bankrate.com. "A high debt-to-income ratio makes lenders nervous. The borrower is just one unplanned expense away from problems." 

As a general rule, it becomes more difficult -- but not impossible -- to qualify for a mortgage or refinance when a person's total debt--to-income ratio exceeds 40% to 45%, Walters said. 

Your credit score counts. Lenders generally want a FICO of 680 or higher to qualify for the best rates in a conventional mortgage. A FICO of 620 tends to be the cutoff that often defines who can, and who can't, get a mortgage. 

Walters noted that there are exceptions to the 620 cutoff, especially when utilizing Federal Housing Administration programs with some lenders. 

Credit scores also could have more wiggle room under the new federal Home Affordable Refinance Program (HARP). 

Gerri Detweiler, personal finance expert for Credit.com, said consumers who are in the process of a refinancing don't want to go out and borrow money to get new furniture, buy a car or even get holiday gifts. Lenders are likely to look at your credit even the day before or the day of closing on that new mortgage, Detweiler said. 

"If you've done something stupid with your credit, you could lose the loan," she said. 

So what if the house you bought for $280,000 and mortgaged for $260,000 is now worth $150,000? 

Right now, you can't do a thing with it. 

For a conventional refinancing, the lender wants at most an 80% loan-to-value ratio. So if your home is worth $100,000 and you owe $70,000, you could qualify. 

The new HARP 2.0 plan due out next week is going to address the underwater mortgage issue further. 

"Anybody who thinks they're underwater, I would say just hold off until the new program comes out," said Brian Seibert, president of Watson Group Financial, a mortgage banker in Waterford. 

The old HARP program had a maximum 125% loan-to-value ratio. But that cap is removed under the new plan. 

"It's easier to refinance through HARP than a conventional refinance," Conley said. 

But remember to stay current with mortgage payments. 

Under HARP 2.0, the borrower would have to be current with the mortgage payment for the past six months and have no more than one late payment in the past 12. 

But Conley and others recommend that even if you were late in the past, you can try to be current now if you want to try to qualify for HARP 2.0. 

"Definitely don't skip the mortgage payment so you can go Christmas shopping," Detweiler said. 

Though the old HARP promised far more than it delivered -- fewer than 900,000 refinancings and just 72,000 of them underwater -- experts say consumers should avoid being discouraged. The revised program, which will run through 2013, could be an improvement. 

The program would lower payments but would not reduce principal, so borrowers would still hold mortgages for more than their homes are worth. But they could avoid foreclosure.