Some reverse mortgages may be getting cheaper. The Department of Housing and Urban Development (HUD) plans to modify the Home Equity Conversion Mortgage (HECM), the nation’s most popular reverse loan program.

Convert home equity to cash

Reverse mortgage loans allow people 62 and older to convert some of their home equity into cash. The proceeds can be used for any purpose and are paid out in a lump sum, through a line of credit, or a combination of both. Although reverse mortgages have helped many seniors supplement retirement income, some of the biggest complaints about these loans are the high upfront fees.

Upfront cost of reverse mortgages reduced

The National Reverse Mortgage Lenders Association revealed the HECM modifications in a press release. Under the proposed changes to the HECM program, the upfront cost of getting a reverse home mortgage would be reduced if borrowers applied for the HECM Saver. The HECM Saver would decrease the upfront cost of Mortgage Insurance Protection (MIP) to 0.01% of the property’s value. The HECM Standard would keep the upfront cost of MIP at 2% of the property’s value, or 2% of the maximum FHA loan limit of $625,000, whichever is greater. HECM Saver borrowers would receive less money than if they applied for a HECM Standard.

“We applaud HUD for undertaking the analysis required and re-engineering the HECM program to create options that will make it a viable solution for more older homeowners,” Peter Bell, President of the National Reverse Mortgage Lenders Association, said in a statement. “The upfront mortgage insurance premium has been a deterrent to some prospective borrowers, particularly those needing less than the full amount available under the traditional HECM Standard program. This new variation, the HECM Saver, presents a sensitive response to their needs.”

Reverse mortgage pros and cons

Anytime you apply to borrow a large amount of money there are going to be pros and cons. Evaluate your situation carefully before committing to a reverse home mortgage. There may be other solutions that can help improve your cash flow. A knowledgeable housing counselor can help you learn more about reverse mortgages so that you can make an informed decision about tapping into home equity.

Home equity loans have a higher delinquency rate than all other types of consumer loans, according to data from the American Bankers Association. According to an article in the New York Times:

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Home Equity Loans and Falling Property Values

Some homeowners who’ve fallen behind on home equity loans are likely to threaten bankruptcy if lenders try to collect. Also, because property values have dropped so much, many borrowers don’t see the point of trying to pay off home equity loans. Some homeowners are even willing to walk away from their homes and let them be foreclosed upon rather than pay off home equity loans and mortgages.

Settling Unpaid Debt

In some cases homeowners have arranged debt settlements for home equity loans. Before going this route keep the following things in mind:

• You must be behind on home equity loan payments before the lender will talk debt settlement
• In some cases your loan must already be in collections to work out a settlement
• Even if you settle a home equity loan, you may owe taxes to the Internal Revenue Service for the forgiven portion of debt
• Debt settlement is going to ding your credit score

Sell Your Property

It may make more sense to do whatever you can to sell your property and get rid of your home mortgage and home equity loan. Of course the housing market isn’t doing so great in many places, but you may be able to get your mortgage lender to agree to a short sale. A short sale occurs when the mortgage lender agrees let you sell for less than what you owe on your home loan. The holder of your home equity loan would have to agree to a short sale as well.

It’s possible that there is a home buyer out there who would be thrilled to get your house at a bargain price. In the long run it would be better to sell your home this way than to end up in foreclosure or bankruptcy, or spend more time stressing over all your unpaid loans.

Borrowers are going to continue having a tough time getting approved for  mortgage loans, according to Michael J. Williams, Fannie Mae’s CEO. Many potential home buyers have been turned away by mortgage lenders looking to minimize their risks as the economic crisis has lingered.

Mortgage Loans for the Next Generation

“A solid majority of renters assume it will be tougher for their kids to buy a home–and they’re right, too,” Williams said at a recent Women in Housing and Finance event. He added: “Across the board, we see a much deeper understanding of how credit, income, job security and a down payment could stand in the way of buying a home.”

Qualifying for a Home Loan

So what can be done to improve your chance of getting approved for a home loan? Let’s look at each of the key areas Williams mentioned.

• Credit. You must clean up bad credit and so that mortgage lenders view your situation in favorable terms. Pay off debt, fix mistakes on your credit report, and avoid being late with monthly payments on bills.
• Income. The days of the getting a home loan without proof of income are over. Whether you are buying a home or refinancing an existing mortgage, be prepared to provide payment stubs, W-2 forms, tax returns, and proof of other assets.
• Job security. Although the media tends to focus on the doom and gloom of high unemployment rates, the fact of the matter is that most adults are still employed in some capacity. The longer you have been employed in a job, the more that helps your mortgage loan application. Try to avoid changing jobs if you plan to apply for a home mortgage.
• Down payment. The amount of money you have to use as a down payment is just as important as what mortgage rate you get. That’s because the more money you have to put towards a home, the less your monthly payments will be. Putting down at least 20% as a down payment also helps you avoid paying mortgage insurance.

Yes, it’s going to be difficult going forward to get approved by a mortgage lender. But that doesn’t mean you have to give up your dream of getting a home loan. If you’re confident you can get approved now, you can begin comparing mortgage rates here.

Low mortgage rates should bring out a stampede of home buyers looking for a deal with housing prices so much more affordable than a few years back. But that’s not happening as many potential buyers stay on the sidelines or can’t get approved for a home loan.

Mortgage Rates at All-Time Lows

Despite the fact that current mortgage rates are averaging 4.56% for a 30-year fixed loan — the lowest level ever — consumer confidence and home builder confidence have dropped. Mortgages rates for 15-year fixed loans are averaging 4.03%.

Frank Nothaft, Freddie Mac’s vice president and chief economist, said in a statement:

The decline in mortgages rates over the past few weeks echoes the recent signs of weakening confidence in the strength of the economy, particularly the housing and consumer sectors. For example, homebuilder confidence declined in July to lows not seen since April 2009, as measured by the NAHB/Wells Fargo Housing Market Index, following the large drop in housing starts reported for June.

Falling Home Values

Home values throughout much of the country have fallen and are expected to show more declines, although some economists say the worst of the housing crisis has passed.

Consumer confidence fell as many folks continued to worry about unemployment and overall conditions in the economy. The Conference Board’s Consumer Confidence Index dropped to 52.9 in June from 62.7 in May.

According to Lynn Franco, director of the Conference Board Consumer Research Center:

Consumer confidence, which had posted three consecutive monthly gains and appeared to be gaining some traction, retreated sharply in June. Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence. Until the pace of job growth picks up, consumer confidence is not likely to pick up.

Current Refinance Rates

Despite the concern about the economy, some homeowners are taking advantage of the low mortgage rates to refinance home loans. Doing a home refinance could make sense if it can significantly lower your monthly payments or get you out of a mortgage with adjustable rates.

You can begin gathering quotes for mortgage refinancing here. If you have a stable income, strong credit score, and equity in your home you may be able to qualify for a home refinance despite concern about where the economy is heading. 

Think the rich are immune to the housing crisis? You would be wrong. According to the New York Times, “more than one in seven homeowners with loans in excess of a million dollars are seriously delinquent.”

Walking Away from Home Loans

CoreLogic compiled data that indicate that people with less expensive homes are more likely to continue making payments to mortgage lenders. “Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment,” the article states. Sam Khater, CoreLogic’s senior economist, was quoted as saying, “The rich are different: they are more ruthless.”

Strategic mortgage defaults have become more common as the housing market has struggled to recover. Some homeowners have simply stopped paying on mortgage loans because  they see no point in putting money into properties that have lost significant value. It’s not that they can’t afford to make payments on home loans, they just don’t want to.

Falling Home Prices

According to a recent article on Freddie Mac’s Web site, many strategic defaulters live in states where housing prices have suffered huge drops. Walking away from homes, the article argues, hurts entire communities in the long run:

That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.

Let’s start with the neighbors. When strategic defaults occur, homes go into foreclosure and sit vacant for some period of time. We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. 

Average Joe and Jane

Ultimately, it’s the average homeowner who is likely to be affected the most. A middle-class family that loses a home through foreclosure is likely to struggle for years to rebuild a stable financial situation.

Defaulting on Mortgages and Still Living Large

When people with million-dollar properties default on home loans, they often continue to have access to other financial resources and investments. They may even have a second or third home to move into and continue to live a pretty comfortable lifestyle.

Avoid Defaulting on a Mortgage

Whatever your income level or home’s value, it’s best to do everything you can to avoid defaulting — strategically or otherwise. Alternatives to strategically defaulting include resigning yourself to making mortgage payments even if you’ve lost a lot of home equity and waiting for the market to recover.

You could also try to refinance your mortgage loan to lower your payments and interest. Finally, if necessary, do whatever is necessary to sell your home to get rid of mortgage payments.

About 65% to 75% of mortgage loans modified through the government’s loan modification program but not backed by the federal government are expected to go into default, according to a report from credit-rating agency Fitch Ratings.

Too Much Debt

The report said that the main reason many home loans modified through the Home Affordable Modification Program (HAMP) are expected to go bad is because borrowers don’t receive help with other debt problems.

“Many of these borrowers still have very heavy levels of other debt, auto loans, credit cards and other expenses” Diane Pendley, a Fitch managing director, told CNNMoney. “We’re talking borrowers who don’t have cash reserves. If they did, they wouldn’t be in this position in the first place. It doesn’t take much for them to get in the same situation again.”

Mortgage Lenders Foreclose

A homeowner who defaults on a home loan that has been modified is likely to face foreclosure.  Mortgage lenders are probably not going to give homeowners a second modification deal.

Asking for a Short Sale

Homeowners who find themselves in the position of defaulting on a mortgage loan that was previously modified, may be able to negotiate a short sale. A short sale occurs when a mortgage lender agrees to let you sell a home for less than what is owed on it. Mortgage lenders sometimes agree to short sales rather than deal with foreclosing on a property mortgage loan.

If you are about to default on a home loan that has been modified consider the following things that could help you arrange a short sale:

• Mortgage lenders are more likely to approve a short sale if you already have a buyer lined up
• It may take several attempts to contact your mortgage lender before getting approval for a short sale
• You must provide all documentation requested as soon as possible if a short sale has been approved

Arrange a Deed-in-Lieu Deal

In some cases you may be able to get your mortgage lender to agree to a deed-in-lieu deal. That occurs when you give back your property to the lender because you can’t afford to make monthly payments on a home mortgage. The mortgage lender is then free to sell the property to try and pay off the balance of your home loan.

There is  no guarantee that your mortgage lender is going to agree to a short sale or deed-in-lieu. But if you truly believe that you are going to default on a home loan that has already been modified, contact your mortgage lender to discuss your options.

Hundreds of people are expected to be arrested next week in a nationwide crackdown on mortgage fraud. The Financial Times reported that the Federal Bureau of Investigation (FBI) plans to make the arrests next week.

Lying on Mortgage Loan Applications

Among those expected to be arrested are people who encourage borrowers to lie about income on home loan applications, mislead homeowners about mortgage rescue programs, and inflate home appraisals. A spokesperson for the FBI would not comment to the Financial Times about the expected arrests.

Rampant mortgage fraud helped contribute to the housing crisis. The FBI has opened 23 mortgage fraud tasks forces around the U.S. since 2008.

Signs of Mortgage Fraud 

So what are some of the signs that you might be a target of mortgage fraud?

• Do not trust mortgage brokers who use high-pressure sales tactics. You should never be forced to sign papers for a home loan. A reputable mortgage broker should encourage you to take  time to fully understand different offers from mortgage lenders.
• If you are asked to lie on a mortgage loan application, find a different broker. You should never exaggerate income or assets to qualify for a home loan. If you know that you cannot afford a particular mortgage but your broker manipulates the numbers to make it look like you can, it’s probably a scam.
• Do not trust strangers who promise to save your home from foreclosure. Among the red flags is being asked to sign over the deed to you home. Never believe promises that sound too good to be true, especially if you don’t know the individual making them.
• Some scam artists try to inflate home appraisals to get approved for a refinance or new home mortgage. You can get a comparative analysis of homes from a reputable real estate agent to get an idea of what properties are worth in your area. If an appraisal comes in significantly higher than that, there may be a scam brewing.

Choose Reputable People 

Mortgage fraud is often perpetrated by people who work in the housing industry. That’s why it is important to thoroughly check out any professionals you are considering working with. Ask people you trust to recommend real estate agents, mortgage brokers, mortgage lenders, home appraisers, inspectors, and attorneys.

If you were expecting mortgage rates to begin rising this year, you may have to wait a while longer. Current mortgage rates are surprisingly low, with 30-year fixed-rate home loans averaging 4.86% and 15-year rates averaging 4.24%. Many economists had expected mortgage rates to rise to around 6% this year, but the European debt crisis has resulted in investors pouring money into American bonds, which has helped lower mortgage rates.

Time for a Home Refinance?

The lower mortgage rates mean you can still get a good deal on a refinance. “It’s another very good opportunity for anyone who hasn’t yet been able to refinance — or has missed other chances,” Keith Gumbinger, vice president of HSH Associates, told MarketWatch. “Rates have unexpectedly returned to near 50-year lows due to the overseas mess, but it’s worth noting that such sudden declines have proven fleeting in the past, with rates bouncing higher just as soon as a permanent (or potentially permanent) solution has been identified.”

Get a Mortgage to Buy a Home

Current mortgage rates are also good news for people applying for a loan to purchase a home. Getting pre-approved for a mortgage loan can improve your chances of having an offer for a house accepted by the sellers. Some real estate agents won’t even work with you unless you have a letter from a mortgage lender that shows you have been preapproved for a home loan.

You can search for mortgage rateshere to get started on the process of getting preapproved. Getting a preapproval letter doesn’t mean you have to actually apply for a home loan with a particular mortgage lender when you are ready to buy. Any preapproval you get probably expires in about three months time, but you may be able to get an extension if necessary.

Documentation Is Important

 Whether you want to do a home refinance or buy a house, you need to provide documentation of your income to mortgage lenders. You need to show proof that you are employed or have a steady income. Mortgage lenders also want to know that you aren’t carrying too much debt relative to your income. Among the financial documents you might have to provide are tax returns, W-2 statements, bank account statements, and recent pay stubs.

Don’t Waith Too Long

Current mortgage rates are very attractive if you want to refinance or buy a home. But don’t expect mortgage rates to remain at such low levels for the long-term. Get moving if you want to lock in a mortgage deal before interest rates begin rising.

Are you unemployed and need help with a mortgage loan? Get in line. Many homeowners have been frustrated with unsuccessful attempts to get help with troubled home loans.

Recent changes in the government’s Home Affordable Modification Program (HAMP) are aimed at allowing borrowers who have been laid off and are underwater on mortgage loans to receive modifications.

Help with Mortgage Loans

The Obama administration’s plan includes local housing agency intiatives, homebuyer tax credits, mortgage loan modifications, refinancing, and community development programs. Depending upon a borrowers situation, they may receive assistance with remaining in a home or relocating to more affordable housing.

HAMP has helped more than 4 million homeowners refinance mortgage loans. Another million are saving an average of $500 a month due to mortgage modifications.

Help for Unemployed

So exactly how can the changes to the program help if you are unemployed?

1. Depending upon your situation you may qualify to have mortgage payments reduced for three to six months while you hunt for a new job.
2. If you don’t find employment or find a job with less income, you could be considered for a permanent mortgage loan modification or HAMP’s alternatives to foreclosure program.
3. Mortgage loan servicers may receive incentives for writing down your principal. They also are being encouraged to extinguish second liens, which could help borrowers who want to complete short sales.
4. Mortgage servicers may receive incentives for improving communication with borrowers.

Is It Enough?

The government’s mortgage loan modification program has hit snags along the way. Critics say mortgage loan servicers were slow to respond and not enough people have been helped, something the Obama administration has acknowledged.

Others say the recent changes in HAMP are only a stopgap since unemployment benefits are no longer going to be factored into income when deciding if a borrower qualifies for a having mortgage loan payments reduced. So far unemployment benefits could be factored into income as long as borrowers could prove the payments would last for nine months. 

Mortgages and Long Term Unemployment

“Any programs that give people breathing space while they’re out looking for work … are a positive thing,” Mark Pearce, the top N.C. mortgage regulator and a leader in national foreclosure-prevention efforts, said in the Miami Herald. However, ”This program doesn’t address the folks that are unemployed for a longer period of time.”

The troubled economy has caused some homeowners to consider accelerating their mortgage loan payments. Although many financial experts caution against paying off a home loan early, many people are ignoring that advice and focusing on owning their homes faster.

Mortgage Interest

One of the most common reasons given to discourage people from paying off a mortgage early is because they won’t be able to deduct the interest they paid on their income tax returns.

Before you accept this argument hook, line, and sinker, use a mortgage payment calculator to see if the amount of interest you can deduct on a tax return beats what you can save on interest by aggressively attacking mortgage principal.

Saving and Investing

Another argument against paying off a home mortgage early involves the notion that you could earn more by investing the money you would put toward extra payments. In some cases you would earn more by investing the money. But it’s important to stay true to yourself and decide what type of risk you want to take with your cash.

Are you going to feel more secure with your money in the stock market or some other type of investment, or are you going to be happier knowing that you are going to own your home free and clear in a few years? Only you can decide if mortgage acceleration is right for your situation.

How to Accelerate Mortgage Loan Payments

If paying off a home mortgage early appeals to you, consider these popular methods:

• Make mortgage loan payments biweekly instead of monthly. This amounts to making 13 payments a year instead of only 12. Although many banks offer to set up biweekly payments for a fee, you can do it on your own. Simply cut your monthly home loan payment in half and pay that amount every two weeks.
• Use bonuses, tax refunds, and other windfalls to pay down your home loan. Make sure you direct the mortgage lender to apply the funds to your principal.
• Refinance mortgage to pay it off in 15 years. Depending upon how much principal you owe, expect to see the monthly payments increase. Make sure you have the income to support the higher mortgage payments.

Pay off Other Debt

Finally, when deciding whether or not to pay off a mortgage loan early, consider whether or not you have other debts. If you have high interest credit card debt or other loans, use extra cash to pay them off before turning your attention to acclerating mortgage payments.