Is the Fha Hope for Home Owners Program a Bad Deal for Home Owner's ?

Actually this FHA Hope Program may prove to be HOPELESS, for both home owner’s and lenders…..Let me explain…..

The President has signed into law legislation that will allow HUD's Federal Housing Administration (FHA) to continue providing targeted mortgage assistance to homeowners. The Hope for Homeowners program will continue FHA's existing and successful efforts to provide aid to struggling families trapped in mortgages they currently cannot afford. Under the program, certain borrowers facing difficulty with their mortgage will be eligible to refinance into FHA-insured mortgages they can afford. The program was implemented on October 1, 2008

Let’s start with the lenders perspective with participating in the Hope Program:

To do this transaction the lender will have to reduce the loan to 90% of thecurrent value of the home, so that means if the original loan was $300,000 and the current market value has dropped to $200,000, and then the lender has to reduce the loan to $180,000 that's 60% of the original loan amount. The property must also be the principal residence and the homeowner cannot own more than one property.

Now if the lender did a modification of the original loan amount they wouldn't necessarily have to reduce the loan amount, but instead just reduce the interest rate and extend the period of the loan to make it affordable.  Now this may seem as a good deal for the home owner….but keep reading.  The new loan will be at today’s current rate, versus with loan modifications interest rates can be negotiated way below today's rates, sometimes as low as 2%. In addition the new FHA Loan will come with upfront mortgage insurance and it will be a 30 year fixed, while with the loan modification they can extend the loan up to 40 years with out mortgage insurance. Not to mention all the other closing cost associated with getting a new loan.

While in the HOPE Program, the homeowner cannot get any second mortgages for the first 5 years of the FHA hope Loan and when you think it couldn't get worst, well….if the house appreciates in the future, the home owner will have to share that equity with the government.  This shared equity starts at 100% to FHA during the first year and will remain at a minimum of 50% to FHA from five years throughout the duration of the mortgage.

For the current lender, it will make more sense to modify the loans themselves than to participate in the FHA Hope For Home Owners Program. And for the home owner they will have more flexibility in rates and terms and they won’t have to share they built up equity with the government.