Do the New Mortgage Rescue Plan Rules Apply to You?

(Nov. 3) - The Obama administration recently tweaked one of its housing rescue plans -- Making Homes Affordable -- to try to extend the plan's lower payments to a larger pool of underwater homeowners -- that is, owners who owe more on their mortgages than their home is currently worth.

Depending on the circumstances, some homeowners qualify to secure a lower monthly payment for an adjustable rate mortgage, a balloon mortgage, or a higher-interest mortgage. Douglas W. Geist, mortgage broker at United Capital Lenders in Southampton, Pennsylvania, says his qualifying customers have saved an average of $85 a month -- and as much as $600. "There's also the security of knowing payments will not rise when interest rates and mortgage rates start to climb," he says.

But eligibility remains a question. Many homeowners still don't understanding if they qualify -- or why they don't. Here's what you need to know about the new rules on Making Homes Affordable.

Earlier this year, MHA qualifying homeowners could refinance up to 105% of the balance of their mortgage with the initiation of this program. "That first limit of 105% was not met with the administration's desired response, and the limit was recently increased to 125%," says Jim Sahnger, mortgage broker and VP at Palm Beach Financial Network in Jupiter, Florida. That means that a home currently appraised at $200,000 can be refinanced for up to $250,000. "That amount can include closing costs but is limited to a maximum of $250 in cash back to a borrower at closing," Sahnger says. That means the homeowner can't wrap any additional debt into the new mortgage.

Interestingly, second mortgages do not impact the loan-to-value ratio. A homeowner with a house appraised at $200,000 who carries a first mortgage of $240,000 and a second mortgage of $60,000 may still qualify for refinancing the first mortgage at up to 125%, or $250,000. "However, approval from the holder of the second mortgage will be required for the refinance," Sahnger says.

There's a big caveat to qualifying for the MHA program. Your mortgage must be owned by either Fannie Mae or Freddie Mac, the two government-funded mortgage giants that were enormous beneficiaries of government bailouts. "Finding out who owns your mortgage is the first step to examining if this is a viable option," says Sahnger. 
"About 60% to 65% of all mortgages are owned by either Fannie or Freddie," Geist says. "That cuts out about 35% of people."

Find out if Fannie or Freddie owns your mortgage at makinghomeaffordable.gov. Click the Refinancing link, under the Learn About Making Home Affordable menu, and answer a questionnaire to determine initial qualifying criteria.

If you qualify based on the questionnaire's information, contact a mortgage broker or banker to start the refinancing process -- although Geist suggests you may feel more comfortable contacting the loan servicer who handled your mortgage, or any qualified broker of banker. "They should have all the tools necessary to determine eligibility."

But watch out for a few other roadblocks.

• Beyond having a mortgage owned by Fannie or Freddie, Geist cautions, your mortgage must also be in good standing; your payment must not have been delinquent during the past 12 months. "Given the economy, that's often the sticking point for so many homeowners," he says. • Another potential hurdle: pay-option adjustable-rate mortgages, or ARMs, which allow for payments less than what an interest-only payment would be. Homeowners with ARMs are unlikely to qualify for a refinance under the MHA program, Sahnger says. "That's a big problem, because so many homeowners have these type of mortgages," he says.

• Yet another sticking point: private mortgage insurance, required by lenders on loans of more than 80% of the home's value. For the refinance to close, the PMI company's additional guidelines must also be met, Geist says. "Unfortunately, the lender's guidelines and the mortgage insurance company's guidelines often conflict, resulting in a loan that can't close," he says. "In many instances, the new PMI is much more expensive than the old premium, so the refinance doesn't produce a notable savings, even if the mortgage's interest rate has dropped significantly."

If you don't qualify for the government-backed loan-modification refinance program, you still have options. "Explore traditional refinance options with your current lender, since those can also save hundreds in interest," Geist advises.

But remember that those options -- and the lowest rates available -- hinge on your credit score. "Before shopping for a traditional refinance option, check your credit score," Sahnger says. Because the market is so tight, you're going to need a good score -- in the 700s -- to take advantage of the lowest rates available. "You can still refinance with a lower score," Geist says, "but you might not qualify for the lowest interest rate."

The most common refinance options available to those who don't qualify for Making Home Affordable are either fixed-rate mortgages -- normally with terms of 15 or 30 years -- or adjustable rate mortgages. Of the two, fixed-rate loans are a safer bet, because interest rates can fluctuate after the initial three- to five-year term -- and they usually rise.

And do some window-shopping before you commit. "Mortgage brokers can usually check rates and programs of many lenders, versus working with a specific bank or lender who only has access to their programs," Geist says. Which means that even if you can't cash in on Fannie and Freddie's plan, you might still have a way to save a few bucks every month.

Gina Roberts-Grey has written for publications including MSNMoney.com, Forbes.com, Glamour, Better Homes and Gardens and Parents.