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September 2007

Refinancing a Sub Prime Mortgage

From the Desk of:
Many recent homebuyers have been misled into buying their homes using sub prime Option-Arm mortgages.  An Option Arm mortgage is the kind you see advertised on the internet with lower teaser monthly payments.  The buyer has the option of the lowest payment which is artificially low to start.  Ultimately, the monthly payment goes up dramatically at some point throughout the life of the loan, most likely after the 24th month.  Many Refinancemortgage brokers led unsuspecting home buyers to believe that they are unable to qualify for a conventional mortgage.  Some may not, but many were able to qualify for FHA  mortgages.  FHA stands for The Federal Housing Authority.  This agency grants buyers the ability to purchase a home with little money down and forgives some past credit problems.  The truth is that most mortgage brokers aren't able to do FHA mortgages due to regulations.  Instead of offering this type of mortgage, or referring them to someone who can, they talked the buyers into using sub prime mortgages.
The mortgages of choice for most were the Option Arms.  These rates start much lower with no required principal payment.  The buyers loved this option since they could have a manageable  payment to start.  These mortgages have a possibility of "negative amortization".  This is a phenomenon where the principal balance owed on the mortgage can actually increase over time resulting in a much higher amount owed.  Many buyers didn't see this as a problem as long as the value of their home grew faster than the increase in the mortgage balance.  Now we can see with a weaker hosuing market that these loans can be a problem for most Option Arm borrowers.  If the home prices go down over the next few years,  these people are in for a real problem.
We need to get as many people as we can to refinance into an FHA or a conventional mortgage within the  next 2 to 3 years before their mortgage rates adjust upward. Most of these loans contain a 2-3 year prepayment penalty made to deter the homeowner from refinancing out of these loans.  Almost all of these Option Arm and other sub prime mortgage rates change and adjust upward after the second year.  This can be a potential problem for the entire housing industry with potentially devastating financing repercussions.  Many of these homes will be foreclosed from the lender.  Current mortgage delinquencies are  already at twice the historic norm.  FHA has instituted and will be implementing a new emergency mortgage bail-out for homeowners with adjustable rate sub prime mortgages.  If the homeowner's mortgage has become late as a result of the higher payment adjustment,  FHA has said that they will refinance the current home.  The stipulations read that the homeowners may not have been late prior to this adjustment.  They will not rescue people who haven't shown the ability to maintain their mortgage current up to the point of rate adjustment.
For many unsuspecting misled home buyer this is a great opportunity for them to get out of their current situation, keep their house and obtain a much lower fixed interest rate.

FHA Saves the Day with Distress Refinances

FHA now allows distressed homeowners to refinance with current late payments on their credit report.  If someone has a full documentation ARM that adjusted recently and is now having Fhaupdate1trouble keeping up, an FHA refinance might be able to help.  The catch?  Late payments on  your mortgage must have only occurred since your loan adjusted.  Also, there are limits on the amount of the loan you can get depending on the county the property is located in:  Monroe County, PA is $200,160; Pike County, PA is $362,790; Carbon County, PA and Northampton County, PA are $305,666.  Current legislation in Washington proposes raising these loan limits dramatically, so these numbers could possibly change soon.

If you need more info on the FHA refi program, send me an email and I will get you in touch with an FHA-specializing lender.