Ask Stacy: Pre-Qualified for a Refinance – Should We Bite?

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Here’s a question I got last week:

We received a notification in the mail, unsolicited, about the Housing and Economic Recovery Program (PL 110-289). They had the amount of our house mortgage, current payments, etc., and then listed what we could have if we went with them, with an interest rate as low as 3.75%. They said we were pre-qualified. We were asked to contact their APL representative. Know anything about this?
– Dave

Here’s your answer, Dave. In the interest of teaching-a-man-to-fish vs. giving-a-man a fish, let’s dissect your question and I’ll show you the steps I took to arrive at my answer.

We received a notification in the mail, unsolicited, about the Housing and Economic Recovery Program (PL 110-289)

Step One: Rather than rely on what this unsolicited mail is claiming, let’s do a web search to make sure the law it’s claiming actually exists. I did a search for “PL 110-289,” and it is indeed a law: The Housing and Economic Recovery Act of 2008. However, does this law have anything to do with you? Let’s find out …

Step Two: Now that we know we have a real law, let’s see what it contains that might help you. I next did a search for “Help with Refinancing PL 110-289″ and quickly learned that this law established the Hope for Homeowners Program, known as H4H. It’s a program designed to prevent people in danger of foreclosure from losing their home. Next, I did a web search for the term “Hope for Homeowners Program” and learned this from one of many sites that came up:

Hope for homeowners is a program designed to assist homeowners, at risk of foreclosure, to refinance to a 30 year fixed rate FHA mortgage. This H4H program is effective October 1, 2008 through September 30, 2011.

Step 3: What are the qualifications? That’s what I searched next: “Hope for Homeowners Qualifications.” I got lots of responses, but chose this page of about.com – that’s a site that often has useful and accurate information. Here’s what I learned there regarding qualifications for the program:

Borrower Qualifications for HOPE for Homeowners Program

The eligibility requirements fit many upside-down homeowners. There is no credit score requirement.

  • The home must be a principal place of residence.
  • Home owners can’t own any other property.
  • The existing mortgage payments must exceed 31 percent of the home owner’s gross monthly income.
  • The home owner did not obtain the existing mortgage by falsifying loan documents.
  • The home owner has not been convicted of fraud within the past 10 years.
  • The home owner is struggling to meet the mortgage obligations and can no longer afford to pay on the mortgage.

The catch is — and you knew there was a catch, right — the home owner must agree to give some future appreciation to FHA and the existing lenders. President Obama’s Helping Families Save Their Homes Act of 2009 lets FHA and the existing lien holders collect 50 percent of the home’s future.

Step 4: Will this program work for Dave? Assuming Dave’s still interested at this point – I have no idea from his email whether he meets the requirements above – he should call a housing counselor to get free help. Here’s a list of housing counselors that I found at HUD’s website in doing my previous search.

But even if Dave qualifies for the Hope for Homeowners program, he might not want to get his hopes up. There have been many programs sponsored by Uncle Sam to try to help beleaguered homeowners. Unfortunately, however, most haven’t had much effect, for two reasons: First, lenders aren’t required by law to participate; and second, many lenders can’t participate even if they want to. That’s because once a mortgage was packaged and sold as a Mortgage Backed Security (MBS) on Wall Street – and the vast majority were and still are – the provisions of the securities don’t allow the mortgage servicing company to reduce the mortgage balance.

The Hope for Homeowners program requires a lender to reduce the mortage to no more than 90 percent of the home’s current value. If your house is worth half what you paid for it, that means the lender would take a huge haircut on a balance reduction – something they can’t or won’t do and probably why this program hasn’t provided much hope to homeowners.

Step 5: Back to Dave’s email.

They had the amount of our house mortgage, current payments, etc., and then listed what we could have if we went with them, with an interest rate as low as 3.75%. They said we were pre-qualified.

Your mortgage is public record. I get unsolicited notices – many looking “official” – all the time from companies who know my mortgage balance. As for being pre-qualified? In order to get a mortgage loan, you must be approved, not just pre-qualified. Pre-qualified is a misleading term that lenders often use to make you think you’re already approved for a loan. But the only thing that will accomplish that is filling out the forms and supplying the information necessary for a lender to determine if you’re a good risk. The interest rate quoted here is also dubious. Any time you see the words “as low as” preceding an interest rate, ignore the number that comes after it, because it’s nothing more than a come-on.

The Bottom line: If Dave is in danger of losing his home to foreclosure and wants to pursue a government program for assistance, he should contact a housing counselor. If all he wants to do is refinance his house, he should do a mortgage search here, find the best rate he can, and start talking to lenders.

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