Many have already discussed the features of the $300 Billion Mortgage Rescue Package signed by President Bush on Wednesday July 30th. This bill is officially known as HR 3221, the Housing and Economic Recovery Act of 2008. Regardless of what everyone thinks and warns about, this is now the law of the land. I know there are many things I can say about the bill, both positive and negative, but I wish to refrain from that at this point.

I’d rather now start making sure those the bill intends to help get the information they need so they can move forward with this new opportunity. So, I’ve put together a guide to help you determine if you are able to take advantage of this bill.

Eligibility

You are eligible if you meet the following criteria:

1. The loan in question is on your primary residence (no allowances are available for second homes and investment properties)
2. The loan was obtained between January 2005 and June 2007
3. Your mortgage payment is at least 31% of your gross monthly income (before taxes – not take home pay)
4. You do not necessarily have to be late on your mortgage payment (you can be current and still take advantage of the program)
5. Whether you are late or current you need to prove that you are not deliberately late on your payment (point #3 above should help you prove your case)
6. You must retire any second mortgages you have taken out (this is going to be tough one for many people – I guess you’re going to need to explain to the second lien holder your plans and ask them to write it off – not sure on this one)

As a side note you must be aware that you will not be permitted to take a second loan in the future without FHA approval and the total will not be allowed to exceed a combined loan to value of 95%. Also this bill makes major changes to the FHA Loan program.

Getting Started

To get started you will first need to obtain approval from your current lender. Please be aware that the current lender is not under any obligation to automatically approve your request. It is a voluntary requirement that the lender comply with the bill. Remember, the lender is being asked to take a loss – writing down the value of the loans up to 90% of its value – so it’s not a walk in the park. Also, in the Phoenix market where we’ve seen a 26.47% drop in home prices from last year alone – the lender is being asked to take an even larger loss. So, be forewarned that you will face resistance from the lender.

Once your lender has agreed to the write down, then you will need to contact a FHA approved lender and go through the loan application and approval process. This means you will need a full appraisal on the house as well. The original lender under the agreement should write off any fees and penalties on the original mortgage such as prepayment penalties. Additionally, the old lender is being asked to pay the FHA up-front mortgage insurance premium of the principle balance (you can see why they will be very careful on who they approve). Once all this has been completed, the old lender is required to then declare the old loan as paid in full. You are now off the hook for the old loan.

The Catch

Now that you have a new loan – more manageable and affordable you need to be aware of a few things.  The first is that you will be required to share any appreciation you gain on your home with the FHA (HUD). You will have to pay the FHA 100% of any profits if you sell the house in the first year – this percentage decreases by 10% every year and stays at 50% after the fifth year. So, if in year seven you make a $30,000 gain you still agree to pay $15,000 to the FHA! Finally, if this wasn’t enough, an automatic 3%  will be charged as you sell or refinance your loan. I guess you can view it as a nice “thank you gift” back to the government for saving you from foreclosure!

Overall it’s a not a bad deal for many who are facing dire financial choices. Considering the alternative, I would recomment that anyone who thinks they might benefit should look into the matter closely.

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