There is a new White House loan modification program that was just announced. It is going to help millions of struggling home owners by cutting down their principal and interest payments by up to 25%.
The new program announced this past Friday, as an extension to other housing relief efforts for those impacted by Covid-19, aims to help borrowers with Federal Housing Administration (FHA), Veteran’s Administration (VA) or the U.S. Department of Agriculture (USDA) loans.
The government agencies that are backing these loans should “require or encourage mortgage servicers to offer borrowers new payment reduction options to help them remain in their home,” stated a recent White House press release.
Most lenders have offered forbearance and some sort of loan modification options since the pandemic relief began last year. The the recent White House announcement definitely makes loan modifications a more concrete option for qualified borrowers, rather than solely leaving it up to the lender’s opinion.
More than 18% in 2020, of all mortgage origination were through the FHA and VA offices. While the USDA Rural Development office does not track its home loan programs at all in relation to the national market, it has a significant impact on rural areas that heavily depend on the USDA to supply mortgages, an agency spokesperson recently commented.
The administration’s new assistance program is meant to help curb a wave of foreclosures post pandemic , especially in today’s current housing conditions of skyrocketing rent and rising home prices across the country.
A White House press released recently stated, “Based on recent analyses, the Administration believes that the additional payment reduction offered to struggling borrowers will result in fewer foreclosures.”
Currently, approximately 1.75 million borrowers are in forbearance, according to the White House. The majority of loans in forbearance (83.2%) are in an extension phase, this means that once the extension expires, they must choose what to do with their home loans. The options include resuming regular monthly mortgage payments with a forbearance repayment plan in place, selling their home and paying off their mortgage or applying for a loan modification.
Mortgage Programs Eligible for New Loan Modifications
The new loan modification rules apply to three types of government-insured loans: FHA, VA and USDA loans.
FHA LOANS
FHA borrowers who are exiting forbearance have a couple of options under the new rules.
- For borrowers who can resume their monthly payments, FHA is requiring all lenders to offer no-cost options for forbearance repayment. So borrowers will get a 0% interest subordinate lien (also called a standalone partial claim) that does not require them to repay the forbearance amount until they sell or refinance their home.
- FHA borrowers who can’t afford their current monthly mortgage payments may be eligible for the Covid-19 Recovery Modification option. This new loan modification option extends the term of your mortgage loan to 360 months (the current market interest rate will be applied to the new loan), and reduces the principal and interest portion of the monthly loan payment by up to 25%.
VA LOANS
VA borrowers that have been financially hobbled by Covid have more options to make their loans affordable under the VA’s new Covid-19 Refund Modification.
- VA borrowers may get up to a 20% reduction in principal and interest mortgage payments, as well as extending their loan to reduce their monthly payments. The total maximum repayment term for an eligible VA loan is 480 months under the new plan.
- The VA also announced a new Covid-19 Refund option, which allows the VA to purchase the outstanding forbearance amount from participating lenders, and then borrowers would repay the debt at 0% interest upon sale or refinance of the property.
- Additionally, the VA can purchase some of the loan principal, up to 30% of the unpaid principal balance as of the first day the borrower started their forbearance plan.
USDA LOANS
The USDA Covid-19 Special Relief Measure will reduce the monthly mortgage principal and interest payments by up to 20% for eligible borrowers. There’s also assistance available to cover past-due mortgage payments and any related fees.
- The USDA has created several tools for lenders to achieve this 20% reduction goal, from term extensions to a mortgage recovery advance.
NEXT STEPS
It is important for borrowers who are facing the end of their forbearance plan (including the extension periods) and still can’t afford regular monthly payments, talk to their lender right away. It’s crucial to determine what your next steps will be before your forbearance period expires. This will help you avoid unnecessary headaches, such as late fees and even foreclosure actions.
If you’re unsure of all your options and rights, speak with a housing counselor who is approved by the U.S. Department of Housing and Urban Development (HUD). They offer free services and are available in every state. To locate a housing counselor in your area, visit the HUD website.