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Alternatives to the Obama Foreclosure Program

By Jeff Brown
President Obama used a White House event on Thursday to promote his $275 billion Making Home Affordable anti-foreclosure program, and some of the nation’s biggest banks now say they’re open for business.

Obama said seven to nine million homeowners can benefit from the program by refinancing to inexpensive fixed-rate mortgages or modifying existing mortgages to cut monthly payments. Wells Fargo (Stock Quote: WFC), JPMorgan Chase (Stock Quote: JPM) and Bank of America (Stock Quote: BAC) are among the lenders beginning to process applications.

Still, not everyone can use these programs. The refinancing program is reserved for homeowners whose mortgages are owned or insured by Fannie Mae (Stock Quote: FNM) or Freddie Mac (Stock Quote: FRE). Qualifying for the modification program is not difficult, but the lender’s participation is voluntary.

Those who can’t use the Making Home Affordable program have alternatives.

Conventional refinancing

With lenders offering 30-year fixed-rate loans at an average of about 5 percent, according to the manybanking.com survey, many people can reduce monthly payments by hundreds of dollars by taking out a new mortgage to pay off the old one.

For a conventional refinancing, you need to be able to afford monthly payments that typically must equal no more than 38 percent of your income. Also, the home must be worth more than you borrow.

A standard refinancing is probably not an option if you are “underwater,” meaning the property is worth less than you owe, unless you have cash to make up the difference between the old mortgage and a new one that is smaller.
Use the manybanking.com mortgage-shopping tool to find a low-cost loan, and use the Maximum Mortgage calculator to figure how large a loan you can afford.

Co-signers

If your income is not large enough for a conventional refinancing, ask the lender if you can have a parent, sibling or friend co-sign a new mortgage. Your income and the co-signer’s income would be combined to qualify for the loan, and your co-signer would be responsible for making the entire monthly payment if you do not.

Remember that a co-signer would have legal rights to the property, including the power to possibly force a sale against your will. You’ll need to have the details spelled out in a lawyer-prepared contract, and it must be consistent with the lender’s requirements.

Gifts

While you are out looking for benefactors, look for a no-strings-attached gift. Federal law allows one person to give another up to $13,000 a year with no tax for either the giver or recipient.

Roommates

Consider taking on a rent-paying roommate or boarder. Check first with local government about any regulations on rentals. Often, rules restrict the number of unrelated people in a household. Also, tenants may have legal rights making it difficult to evict a roommate who is not working out.

Income from a renter is taxable, but that may be partially offset by deductions for rental expenses such as advertizing and maintenance.

Short sale

If all else fails, your lender may allow you to sell the property for less than you owe. In a short sale, the lender forgives the difference. The lender may agree to this because it is cheaper than going through foreclosure.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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