[Updated March 4 2009] This was a question I received based on an earlier article looking at the refinancing under current market conditions. With interest rates at historic lows, refinancing has become a very attractive option for many home owners who could save thousands of dollars on their mortgage interest repayments. For example, by refinancing from a 6.75% rate to 5% rate on a $200,000 mortgage, could reduce monthly repayments by up to 17%!

Unfortunately for millions of Americans the savings from refinancing to a lower rate are out of their grasp because they do not qualify, due to the tighter eligibility criteria resulting from the credit crisis. Twenty percent equity stakes and 700+ credit scores are becoming the norm rather than the exception. While tighter criteria would have been prudent in preventing loans being made to irresponsible borrowers during the housing boom, it seems that the banking industry has gone to other extreme by making refinancing available to so few.

However Obama's new $75 billion “Homeowner Affordability and Stability Plan” (housing) plan may provide the refinancing relief many responsible home owners were looking for. Here are the main provisions for refinancing under the plan:

1. Have a conforming loan backed by Fannie Mae or Freddie Mac. Approximately 60% of single-family “conforming” loans are backed by these Government controlled mortgage giants. These are the companies that buy the loans from your bank/servicer and then sell them to Wall Street. A conforming loan is one under $417,000 in many areas — or up to $729,500 in certain high-cost areas like San Francisco, Boston or Washington, DC. Most home owners will have no idea if their loan is “backed” by Fannie or Freddie, but your lender or servicer does. So call them and then ask about qualifying under Obama’s housing plan.

2. Your Loan to Value ratio can now be as high as 105%. Under current conditions you cannot refinance mortgages where the loan-to-value (LTV) ratio exceeds 80 percent without some form of credit insurance. That insurance can be difficult or impossible to obtain in parts of the country that insurers have labeled declining markets, with high risks of further deterioration in values. Under the Obama housing plan, the LTV has been raised to 105%, which means you qualify even if you owe between 80-105% of your mortgage. However it you are severely “underwater” and owe more than 105% of their home’s value you will not qualify and may have to wait for mortgage relief via other lender driven provisions in the housing plan.

3. Allows borrowers with less than 20% equity in their homes to refinance to the current prevailing rate. However they must meet the above LTV criteria.

4. Timeframe Eligibilty. Only Loans that originated on or before January 1, 2009 are eligible for this program. The modification program will be in effect until the end of 2012, but loans can only be adjusted once.

5. Bonus Payments. Borrowers who keep up with their new payments will receive up to $1,000 a year in principal reduction, for up to five years.

6. Modification Threshold. Servicers will follow a specified sequence of steps in order to reduce the monthly payment (with government subsidies) to no more than 31% of gross monthly income (DTI).



More than 25% of home owners will qualify under the new refinancing criteria, but there are some restrictions to prevent abuse of these new provisions.

> The cutoff date for the program is June 10, 2010. Each servicer will provide details on the terms and costs associated with refinancing. This should provide transparency and information on the effectiveness of the program.

> No "cash outs" will be permitted. This means the new loan balance can total only the previous balance, plus settlement costs, insurance, property taxes and association fees.

> Loans that had mortgage insurance will likely continue to have coverage under the existing amounts and terms, thereby limiting Fannie and Freddie's exposure to loss. But loans where borrowers originally made down payments of 20 percent or more will not require new insurance for the refinance, despite current LTVs over the 80 percent limit.

> Loans balances will not reduce. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.

> Participating loan servicers will be required to use a net present value (NPV) test on each loan that is at risk of imminent default or at least 60 days delinquent. The NPV test will compare the net present value of cash flows with modification and without modification. If the test is positive – meaning that the net present value of expected cash flow is greater in the modification scenario – the servicer must modify absent fraud or a contract prohibition.

If you think you will qualify you should start getting ready to start the refinancing process as soon as possible because there will be a huge rush of applicants. Borrowers can now contact their loan servicers to see whether they are eligible for assistance. Federal officials have posted additional information for borrowers to determine their eligibility at hud.gov. To prepare, start gathering the information that you will need to provide to your lender which includes:

• Documentation for income sources (monthly and one-off), including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must sign an affidavit of financial hardship.
  
  
• Information about any second mortgage on the house
  
  
• Payments on each of your credit cards if you are carrying balances from month to month, and


• Payments on other loans such as student loans and car loans.

Source and more details : Treasury Fact Sheet , CNN

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