Bailout help for struggling homeowners

By Steve McLinden • Bankrate.com
Besides helping would-be homeowners, the government has announced several plans designed to provide relief for people who already own homes but are struggling to keep up with their payment. Here are three ways homeowners can get assistance:

• Payment reduction and refinancing.
• Expansion of the home-improvement tax credit.
• Higher FHA reverse-mortgage loan limits.

Payment reduction and refinancing

The federal government’s Making Home Affordable program is intended to help current homeowners remain in their homes even if they are struggling to make their mortgage payment.

This initiative targets at-risk homeowners, including those who owe more on their homes than the home is worth, a common position known as being “underwater” or “upside-down.” It aims to help homeowners reduce monthly payments to more manageable levels.

The program has two aspects — a loan refinance program and a loan modification program.

The refinance program — known as Home Affordable Refinance — offers borrowers who haven’t missed a payment but are at risk of default with a chance to refinance at rates as low as 2 percent.

“The real benefit is for people who were underwater who couldn’t get a regular refinance,” says Joe Gross, president of Teaneck, N.J.-based Qualified Mortgage Inc. and author of “How the Greed of Wall Street and Your Mortgage Lender Are Destroying America’s Credit.”

“It lets them do a noncash-out refinance even if they don’t have any equity in the house,” says Gross.

The loan modification program — known as Home Affordable Modification — modifies loans so a borrower’s housing payments are no more than 31 percent of monthly gross income.

“If this helps keep 4 (million) to 5 million people in their homes as intended, it will help us dig out of this recession,” says Gross.

Bankrate offers two quizzes that can help you determine if you qualify for either a refinance or a loan modification.

Expansion of the home-improvement tax credit

The tax credit for making energy-efficient home improvements has been raised to 30 percent of the cost of the improvements, up to a maximum of $1,500.

Eligible improvements — which must meet the standards established by the federal government — include replacing doors and windows; adding insulation; and installing new heating, air conditioning systems and water heaters.

“The tax credit on home improvements works as a great incentive for homeowners who need to make energy-efficient improvements to their homes,” says Greg Smith, a Certified Financial Planner with The Wise Investor Group in Reston, Va.

The fact that these incentives are credits rather than deductions makes them even more appealing, says Smith.

“It is well worth taking advantage of a tax credit (as opposed to a deduction), since you get 100 percent back on your taxes from a credit,” he says. “In this case, the homeowners will also have the benefit of reduced utility bills in future years.”

Michael Dooley, a financial planner with The Patriot Financial Group in Beverly, Mass., agrees the home-improvement tax credit could motivate some homeowners to make energy efficiency improvements. But he also cautions that people who fear unemployment are less likely to take advantage of the incentive.

“The theory is great, but people need to be able to pay for these improvements upfront,” says Dooley.

Higher FHA reverse-mortgage loan limits. Loan limits for reverse mortgages insured by the Federal Housing Administration have been increased to $625,500 across the country.

“The loan limits for reverse mortgages have been too low for some time, so this increase could have a big impact,” says Gibran Nicholas, chairman of the CMPS Institute, which certifies mortgage banker and brokers.

The previous limit was $417,000 across the country, which meant that in markets where homes are more costly — such as the San Francisco area, New York City and its suburbs, and Washington, D.C. — FHA-insured reverse mortgages were not available for many homes.

Many private reverse-mortgage programs have disappeared, making FHA loans “virtually the only game in town,” Nicholas says.

Nicholas says the higher FHA reverse-mortgage limits are especially important in light of the “HECM for Purchase” program passed into law as part of 2008 federal stimulus legislation.

The program — which took effect Jan. 1 — allows older homeowners to use the proceeds from a reverse mortgage to purchase a new principal residence. To qualify for a new-purchase reverse mortgage, buyers need to be seniors over age 62 and have to presently own a home.

“Senior citizens who want to move have been stuck in this market, but now they can take a reverse mortgage on a new purchase and pay it off when their existing home sells,” Nicholas says. “They don’t have to wait until their current home sells to move.”

Nicholas thinks the changes to reverse mortgage rules could improve markets in places popular with retirees, such as Florida and Arizona.

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