With so many homeowners disheartened by the lack of acceptance into permanent loan-modification programs or being unable to qualify for a refinance due to poor credit, this HUD program may be the answer. It has a nice upside: The loan amount that the qualifying borrower owes through the Emergency Homeowners Loan Program does not have to be repaid for five years, and the amount due declines 20 percent annually if certain conditions are met.
Bridge loans typically are known for having high interest rates, but this one, with an amount that can actually decline over time, is unique in that there is no interest due, even for homeowners who don't uphold their end of the agreement. The downsides to applying: the possibility of being foreclosed on by this junior lienholder, getting kicked out of the program early, or failing to qualify before the money runs out.
The qualifications and terms, detailed below, seem simple and beneficial to homeowners in distress, provided that their income increases within two years.
For the loan program, the Department of Housing and Urban Development is setting aside $1 billion in funds earmarked for homeowners in Puerto Rico and the 32 states not covered by the Department of the Treasury's Innovation Fund for Hardest Hit Housing Markets program. The HUD funds will be disbursed to each of these states, based on their proportional share of the nation's unemployed homeowners with a mortgage.
Texas will receive the most, about $135 million, unemployment.
The loan program will pay 100 percent of the arrears (mortgage principal, interest, mortgage insurance premiums, taxes, hazard insurance and ground rent, if any). It sets a monthly payment for the homeowner that is 31 percent of gross income at the time of application, so long as it is at least $25 per month. The difference between the homeowner's payment and what's due to the mortgage lender will be paid by the fund.
When it's time for repayment five years later (if the homeowner successfully remains in the program), HUD will shave off 20 percent per year from the amount due on the bridge loan, until it's paid off or is terminated by a sale, refinance or other means.
How to Qualify
A homeowner who typically is a wage or salary worker, or self-employed, must meet these requirements:
Income thresholds -- Total household income prior to the homeowner's recent income drop must be equal to, or less than, 120 percent of the Area Median Income (AMI), which includes wages, salary and self-employed earnings and income.
Significant income reduction -- The income loss must equate to a current gross income that is at least 15 percent lower than their previous household income.
Delinquency and likelihood of foreclosure -- Must be at least three months delinquent on payments and have received notification of or otherwise can prove an intention of the lender to foreclose.
Ability to resume repayment -- Has a reasonable likelihood of being able to resume repayment of the first mortgage obligations within 2 years, and meet other housing expenses and debt obligations when the household regains full employment. This will be determined, in part, by the homeowner having had a debt-to-income ratio below 55%, based on the gross income they had before the recent job setback.
Principal residence -- Must reside in the mortgaged property as a principal residence, and it must be a single-family residence of a one-to-four-unit structure or a condominium).
Termination or Repayment Reasons
A homeowner can be terminated from the monthly assistance program, meaning they are back to being fully responsible for their own original first lien mortgage payments, if:
- The maximum loan ($50,000) amount has been reached;
- The maximum assistance time of 24 months has been reached;
- The homeowner fails to report changes in unemployment status or income as indicated;
- The homeowner's income regains 85 percent or more of its pre-event level;
- The homeowner no longer resides in, sells, or refinances the debt on the mortgaged property; or
- The homeowner defaults on their portion of the current first lien mortgage loan payments.
For more on mortgages see: "Mortgage Jargon in Simple Terms."