Truth in Foreclosure

I wrote Monday about the changes to HUD’s Hope for Homeowners (H4H) program.  In that post, I promised to describe the equity sharing arrangement you must agree to if you want to refinance through H4H.

As a quick review, H4H allows you to refinance your current mortgage at 90% of what your home is worth.  If your lender agrees to write down your principle balance, your new loan will be a 30-year, fixed-rate loan.  The changes announced in late May provide several incentives for lenders to participate, but you and all of your lenders have to make several concessions.  The biggest of these is that if you sell your home or refinance it within the next 5 years, you have to share any appreciation that happens between now and then.

Here’s How Equity Sharing Works

Keep in mind that these are only examples, and your actual experience will depend on many things, including how much your home increases or decreases in value.

Current value of your home                                              $200,000

Your new FHA mortgage is 90%, which equals          $180,000

Equity created by your new loan                                       $20,000

In this example, you, the FHA, and (possibly your lenders) share this $20,000 when you sell your home or refinance your loan.  Here’s how that $20,000 would be split if you sell or refinance:

During Year 1          FHA gets 100% of this equity ($20,000)                You get 0% ($0)

During Year 2          FHA gets 90%  ($18,000)                                         You get 10% ($2,000)

During Year 3          FHA gets 80% ($16,000)                                          You get 20% ($4,000)

During Year 4          FHA gets 70% ($14,000)                                          You get 30% ($6,000)

During Year 5          FHA gets 60% ($12,000)                                          You get 40% ($8,000)

After Year 5             FHA gets 50% ($10,000)                                            You get 50% ($10,000)

So, if you sell or refinance right after receiving the new loan, the FHA keeps the equity that was created, and you don’t receive any of it.  On the other hand, let’s assume you stay in this loan and don’t sell or refinance for ten years.  At that point, you’re entitled to half of the equity – in this example, that’s $10,000 – and the FHA is entitled to the other half.

Here’s How Appreciation Sharing Works

In addition to this equity sharing, you will have to share any future home price appreciation with the FHA.  This means that, if your home has gone up in value between the time you receive your FHA mortgage and the time of your home sale (or other disposition), you will share the amount of this increase with the FHA (less closing costs and a portion of any improvements you have made).  This is a 50/50 split that does not change over time.

For example, if:

Value of your home when this loan is taken out                                                     $200,000

You sell (after any period) for                                                                                      $250,000

Your home appreciated                                                                                                 $50,000

In this example, you would keep half of this, or $25,000.  The FHA (and potentially your original lender(s)) would also receive half ($25,000).

But what if the value of the home goes down?

Value of your home when this loan is taken out                                                     $200,000

You sell (after any period) for                                                                                      $175,000

Your home depreciated                                                                                                -$25,000

In this example, the appreciation is actually negative (the home has depreciated), so there is nothing of financial value to share.  As far as the appreciation sharing feature of your HOPE for Homeowners loan, neither you nor the FHA would receive anything.

These examples assume that there are no closing costs when you sell your home and that you have made no improvements to your home.

Again, keep in mind that these are just examples, and your actual experience will vary depending on factors such as:  How much your home is worth when you get a new HOPE for Homeowners loan, how long you stay in your home, and how much your home is worth when you sell.

Twitter This Post

Username: Password (this is not saved):

Related posts

• Take Advantage of President Obama’s Plan (35)
• Refinancing Options for Upside Down Mortgages (0)
• President Obama’s Plan – What No One Is Telling You (8)
• President Obama’s Making Home Affordable Refinance (9)
• President Obama’s Home Affordable Loan Modification (132)