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.

Reverse mortgages have fans and critics. These home loans allow people 62 and older to borrow against the equity in their property. Here are some of the pros and cons for reverse home loans.

Pros of Reverse Loans

It can be difficult to cover all your financial obligations if you don’t have enough money coming in each month. Many seniors use reverse mortgages to supplement their income. Some advantages of these loans are:

1. Money borrowed doesn’t have to repaid until you move or die. There are no monthly payments as with a traditional mortgage loan.
2. You can use reverse mortgage proceeds for any purpose, including medical bills, debt, or home repairs. The money can be received as a lump sum, through installments, or as a line of credit.
3. The amount you can borrow increases as you age and as your home value rises. A reverse mortgage counselor can help figure out how much you might be able to borrow.

Cons of Reverse Home Mortgages

Reverse loans have some drawbacks you should be aware of:

1. Borrowing money this way can decrease the inheritance you leave behind for you kids. If leaving a home or other assets to your heirs is important, consult with an estate planner to decide if a reverse mortgage is a good move.
2. Reverse mortgages use negative amortization, so the balance grows over time. People who receive the money through a line of credit could have the option of paying back some of the money as they go along to cut the balance owed.
3. There are limits to how much you can borrow with a reverse loan. Currently, the limit for a Home Equity Conversion Mortgage (HECM) is $625,000.

Reverse Mortgage Counseling

Reverse mortgage loans should be considered carefully and used as a last resort for finding a new income stream. Before applying for a loan you must receive counseling from a Department of Housing and Urban Development-approved counselor.

A counselor can review your finances and determine if there are alternatives to reverse loans that may be more helpful. Search for information on reverse loan counselors in your area at the HUD Web site.

Compare Reverse Loans

It’s important to get as much information about reverse loans as you can before starting the application process. Compare different loan offers to decide if borrowing money this way is right for you.

Many people dream of owning a home. They do whatever they can to scrape together a down payment on a mortgage loan and work many years to pay it off. But should you buy a home or continue to rent? Here are some things to consider.

1. Are you ready for the responsibility? Owning a home involves a variety of chores and financial investments. Are you ready to do yard work, home repairs, and other tasks that you currently don’t have to think about because you have a landlord? If you are not willing to do the work, or can’t afford to pay someone else to do it, you may not be ready for homeownership.
2. Do you have enough saved up for a down payment on a home loan? The larger the down payment, the smaller your monthly payments are going to be. Mortgage lenders also look more favorably on people who have a sizable down payment, healthy income, and low levels of debt.
3. Have you done your homework to understand the different types of mortgage products available? Just because your friend got a 15-year mortgage loan doesn’t mean that’s the right product for you. Knowledge is power and can keep you from getting into the wrong type of mortgage.
4. Do you need assistance from a first-time homebuyer program in your community? You may be able to get free advice from a housing counselor or help with a down payment.
5. Do you plan to use the first-time homebuyer tax credit? If so, you need to have a contract on a home before May 1, 2010, and must close on the home before July 1, 2010. If you qualify for the tax credit, you could receive up to $8,000.
6. Have you shopped around for mortgage quotes to get an idea of how much you can borrow? Compare offers from several mortgage lenders before choosing one to do business with.
7. Have you carefully researched the neighborhood you want to move to? Have a real estate agent do a comparative analysis of homes that are similar to what you want to purchase. Ask about foreclosure rates in the area and whether there is any data on how many homes are underwater on mortgages.

There are a lot of things to consider before taking the leap from renting to homeownership. Avoid feeling pressured to buy a home because everyone tells you that is the American dream. You may be content to continue renting a while. Consider all your options carefully so that you have no regrets in the future.

People struggling with mortgage loans in five states are getting additional aid to get them through the housing crisis. President Obama said the government plans to give $1.5 billion to local and state housing agencies in an effort to help troubled homeowners.

Help for Troubled Mortgage Loans

Funds are to go to agencies in Nevada, California, Arizona, Florida, and Michgan, states hit hardest by the housing downturn. Those states have seen housing prices plunge more than 20% from their peak.

Money can be used in various ways, including modifying home loans that are underwater or helping unemployed people struggling with mortgages to avoid foreclosure. Housing agencies can also use the aid for “programs encouraging sustainable and affordable homeownership,” according to the White House blog.

Get Help with Your Mortgage

While these programs should help many troubled homeowners, you may need to look for relief sooner than that. Contact your mortgage lender or loan servicer if you are already behind on monthly payments. You may be eligible for a mortgage refinance or loan modification.

Refinance Mortgage

Mortgage refinancing through the government’s program requires:

• Your mortgage loan to be guaranteed by Fannie Mae or Freddie Mac
• You to be current on mortgage payments
• The ability to make payments on the refinanced home loan
• You to be the owner-occupant of a one- to four-family home

If you don’t have a home mortgage guaranteed by Fannie Mae of Freddie Mac, don’t assume that your mortgage lender can’t help you. They may have some other program to help you do a mortgage refinance.

Mortgage Loan Modification

Getting approved for a home loan modification through the government’s program requires:

• Your mortgage payment (including taxes and insurance) to be greater than 31% of your monthly gross income
• You must be able to document financial hardship that is keeping you from affording your mortgage payment
• Have a first lien that originated before Jan. 1, 2009

If you are facing foreclosure, mortgage loan servicers can’t proceed with a foreclosure sale until you’ve been evaluated for help through the mortgage loan modification program.

Contact Mortgage Lender

The most important takeaway is that you must be proactive about getting help with your mortgage loan. Ducking and dodging phone calls and letters from your mortgage lender isn’t going to help your situation. Be diligent about tracking down someone at your mortgage lender who is authorized to set up some kind of deal to get back on track with your home loan.

CitiMortgage is giving some homeowners struggling with mortgage loans a break. The mortgage lender is allowing distressed homeowners in six states to remain in their homes rather than face foreclosure.

Foreclosure Alternatives Program

CitiMortgage is offering the deed-in-lieu program to people who currently have a home loan through CitiMortgage and live in Texas, Florida, Michigan, Illinois, New Jersey, and Ohio. They must be at least 90 days delinquent on mortgages to qualify for help.

The distressed homeowners will be able to remain in their homes for six months while figuring out where to move. After six months, they must agree to sign over their property deeds to the mortgage lender.

Sanjiv Das, CEO of CitiMortgage, said in a statement, “At CitiMortgage, we’re committed to finding every solution possible to help families facing foreclosure. However, the reality is that not every homeowner has the financial ability to remain in their home. The goal of the program is to help homeowners make a smooth transition into the next chapter of their lives.”

Mortgage Lender Gives Relocation Help 

As part of the agreement, CitiMortgage provides relocation counseling and at least $1,000 to help borrowers move to other housing.

Some homeowners may receive assistance with certain housing expenses if they can’t afford them. Although borrowers are responsible for utility bills, the mortgage lender may help with other costs, such as homeowner’s association dues and escrow fees.

Keeping Homes from Being Trashed

The assistance program also requires homeowners to maintain homes in their current condition. “Once the owner moves, we get the property that’s in better condition, so we can immediately market it,” Mark Rodgers, Citigroup’s director of public affairs, told the South Florida Business Journal.  ”It’s much more likely to sell quickly in good condition than in bad condition.”

Mortgage Modification or Short Sale

Before a distressed homeowner is helped through a deed-in-lieu of foreclosure, the lender evaluates the situation to see if a mortgage modification can help. Borrowers who don’t qualify for a mortgage loan modification may get approval for a short sale. That allows them to sell for less than they owe on a home loan.

Only when a homeowner can’t be helped with a mortage loan modification or short sale are they considered for the deed-in-lieu program.

Fannie Mae is offering buyers of its foreclosed homes help with mortgage closing costs.

Mortgage Closing Costs or Appliances

Homebuyers who purchase a HomePath property owned by Fannie Mae will receive 3.5% of the final sales price toward closing costs on a home loan or appliances. Homebuyers also can choose to apply the incentive to a mix of closing costs on a mortgage loan and appliances.

To receive assistance you must purchase a property listed on HomePath.com before May 1, 2010.  Offers must be accepted on or after Jan. 28, 2010.

The HomePath Web site has photos of available homes and detailed property descriptons. Only properties purchased as your principal residence qualify for the program.

Reducing Inventory of Homes

 ”Attracting qualified buyers to the market and reducing the inventory of vacant homes is critical to stabilizing neighborhoods and helping the market recover. Many families are taking advantage of the federal homebuyer tax credit to buy a new home so this is a great time for Fannie Mae to offer some additional help,” Terry Edwards, Executive Vice President of Credit Portfolio Management, said in a statement.

Fannie Mae sold 89,691 foreclosed homes in the third quarter of 2009, according to the Washington Post. 

Talk with Fannie Mae Listing Broker

People who are interested in getting a mortgage and with assistance from Fannie Mae should discuss their options with a Fannie Mae listing broker. Mortgage lenders can restrict how the 3.5% incentive can be used.

Fannie Mae Mortgage Help

Fannie Mae also offers financing on some homes. The agency offers mortgage loans with low down payments even if you don’t have the best credit. The home loans don’t require mortgage insurance or appraisal fees. The HomePath Renovation Mortgage is available to purchase and renovate homes.

The down payment for both types of mortgages must be at least 3% and can be funded by your savings, a gift, grant, or loan from a nonprofit, state, or local government, or employer.

Homebuyer Tax Credit

Homebuyers also can claim the First-Time Homebuyer Credit for homes purchased through April 30, 2010. They must close on home loans by June 30, to be eligible for the tax credit, according to the Internal Revenue Service. 

First-time homebuyers are eligible for a tax credit up to $8,000. Existing home owners who have lived in their house for five consecutive years out of the past eight are eligible for a tax credit of up to $6,500.

Expect to pay more money to borrow a mortgage loan insured by the Federal Housing Administration  (FHA). Policy changes at the agency are designed to help the FHA better manage its risk as the housing market recovers.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to under-served communities, and supporting the nation’s economic recovery is critically important,” FHA Commissioner David Stevens said in a statement.

Here’s what you can expect if you apply for an FHA mortgage.

Mortgage Insurance Premiums Rise

The FHA is raising the mortgage insurance premium (MIP) to help build up capital reserves and help spur private lending. The upfront MIP is rising to 2.25% from 1.75%. The FHA intends to shift some of the premium increase to the annual MIP from the upfront MIP so it can have less impact on borrowers.

Mortgage Loans and FICO Scores

 The policy changes now require borrowers to have a FICO score of at 580 to qualify for the 3.5% down payment on a FHA home loan. Anyone who has a FICO score below 580 must make a down payment of at least 10%. The new credit score requirement goes into effect this summer.

Less Help from Sellers

The revised guidelines decrease the amount of help you can get from the seller when buying a home. The FHA is reducing concessions by sellers to 3% from 6%. Concessions include things such as sellers helping with closing costs. This change conforms to industry standards.

More Enforcement on Mortgage Lenders

The FHA also says it plans to report performance rankings on mortgage lenders as a complement to Neighborhood Watch data. The move is aimed at making mortgage lenders more accountable.

Troubled Mortgage Loans

As the economy has struggled more borrowers have turned to FHA mortgages because they require smaller down payments than other loans. About 30% of new home loans are insured by the FHA. Now, the FHA finds itself burdened with a slew of troubled loans.

The FHA says it is still committed to proving mortgages to first-time homebuyers. But the tougher lending requirements mean some people may not qualify for  mortgage loans.

“It will slow the growth in demand.  Any time you put up roadblocks, fewer people will qualify,” Joel Naroff, of Naroff Economic Advisors, told USA Today. “This is just the beginning of clearer and more specific requirements so we don’t get into the mess we got into again. In the short term, it will have an effect, but it won’t be a huge effect.”

More homeowners are choosing to walk away from their mortgage loans rather than make payments on homes that have lost significant value. These strategic defaulters intentionally stop paying on mortgages even though they can afford to make the payments.

The practice has many people debating the ethics of walking away from home loans. Some people see nothing wrong with the practice while others say homeowners who intentionally default are immoral.

Mortgages as Baggage

Strategic defaults have especially risen in Arizona, California, Nevada, and Florida, according to the Wall Street Journal. Those states have high percentages of people underwater on mortgage loans, owing more than their homes are valued at.

Promise to Repay Mortgage Loan

While it may make financial sense to walk away from a home loan, the fact is that anyone who borrowed money signed a promissory note to repay the loan. That promissory note didn’t say pay up unless home values go down or until you get tired of making monthly payments.

Financial Damage

So what happens when homeowners strategically default? First, they end up in foreclosure, and the mortgage lender takes possession of the property. Then their credit scores get hit, plunging as much as 160 points. They also may have other assets seized by their mortgage lender depending upon where they live.

Mortgage Defaults Hurt Community

Strategic defaults don’t just hurt individual homeowners. They also affect the neighborhood where the property is located. Foreclosures significantly impact the property values of surrounding homes. The closer you live to a foreclosure, the more it negatively affects your home’s value, especially if it looks abandoned and poorly maintained.

People who lived withing 300 feet of a foreclosure usually saw their property value drop 1.3%, according to a 2008 study. People within 300 to 500 feet of a foreclosure had a 0.6% drop, according to the New York Times.

Could It Happen Again?

On the positive side strategic defaulters may be able to cut their housing costs while they rent for a while. That could help them save money. But it seems that if these people are willing to renege on a home loan once, they’re likely to do it again in the future if they don’t like the housing hand they’re dealt.

Strategic defaults are likely to continue as more people become fed up with being underwater on their mortgage loans. But anyone who decides to take this step should be prepared for the fallout.

Obtaining a new mortgage loan, auto loan, or other types of credit is going to be tough for years to come. They also may feel disapproval from other people who faithfully continued paying on their home loans even though they are underwater too.

Single home buyers are more likely to be female than male, according to the National Association of Realtors (NAR). The group found that 20 percent of home buyers were single women, compared with 10% of single men. Singles who were first-time home buyers also were more likely to be women (24%) than men (12%).

Women Know What They Want

Perhaps the higher purchase rate is related to the fact that women tend to make up their minds faster when it comes to purchasing real estate. A Coldwell Banker survey found that 70% of women knew the day they walked into a house that it was right for them, compared with 62% of men.

Women and Subprime Mortgages

But even though it may not take long for women to choose the house of their dreams, it’s important that they don’t rush when choosing a home loan. Studies have shown that women are more likely than men to have subprime mortgages, and Black and Latina women have more subprime home loans than white women.

Comparing Mortgage Loans

So what should you look for when choosing a home mortgage?

• Mortgage rates are important, but so are other fees associated with home loans. Many people — not just women — make the mistake of only focusing on mortgage rates and don’t look at the annual percentage rate (APR), which is the true cost of borrowing money.
• Steer clear of adjustable rate mortgages (ARMS) or other risky products. A fixed-rate mortgage gives you set monthly payments and no surprises.
• Get a Good Faith Estimate (GFE) of closing costs from each mortgage lender offering a deal. The GFE helps you compare apples to apples.
• Look for mortgage lenders with years of experience. Avoid fly-by-night operations that don’t have a track record and make outrageous promises.

You can begin gathering home loan quotes from mortgage lenders here.

Paying for Your Mortgage

Every homeowner should have a solid budget to help them continue making monthly payments on a mortgage while putting money aside in savings. But a single homeowner  who loses her job could end up having an even tougher time paying on a home loan than a married person who is unemployed. Single homeowners usually don’t have a second income to rely on to make mortgage payments, while married people may be able to fall back on the second income.

Never bite off more mortgage than you can afford. Make sure your income covers not only your mortgage payments, but other monthly expenses, too.

I recently wrote about how more than 650,000 home mortgages had been modified this year through October because of the government’s foreclosure prevention plan. That number increased to more than 697,000 mortgage loans through November, but most of them were only trial modifications, according to Bloomberg. 

Permanent Mortgage Loan Modifications

Although the Making Home Affordable program aimed to help 4 million distressed homeowners, only 31,382 mortgages have actually been permanently modified, according to the Treasury Department. GMAC Mortgage Inc., JPMorgan Chase & Co., and Ocwen Financial Corp. completed the most mortgage loan modifications.

What’s Holding up the Process?

Home loan modifications have been affected by a variety of factors. The Obama administration has said that about a third of borrowers failed to provide proper proper documentation to get their mortgage loans modified permanently. Loan servicers also have dropped the ball in many cases. Some loan servicers have lost documents submitted by borrowers or not requested the appropriate documents.

Putting Pressure on Mortgage Lenders

The Treasury Department is stepping up pressure on mortgage lenders to get more loans permanently modified. In the meantime, more homeowners are falling behind on mortgage payments. About 7.9 million homeowners got behind on mortgage payments in the third quarter, according to the Mortgage Bankers Association.

Do Mortgage Modifications Have Poor Outlook?

Laurie Goodman, senior managing director of Amhert Securities Group LP, told Congress last week that the mortgage loan modification program is “destined to fail” because it doesn’t address the fact that so many homeowners have negative equity in their homes.

About a quarter of U.S homeowners have negative equity in their homes. That means they owe more on their mortgages than their homes are worth. Previously, estimates had put the number of homeowners with negative equity at around 32%.

Refinance Mortgage

Mortgage loan modifications obviously don’t work for everyone. But if you still need help lowering your monthly mortgage payments, consider mortgage refinancing. Contact your loan servicer to see if you qualify to refinance your mortgage through the Making Home Affordable program. To get refinancing through the government’s program you must be current on monthly payments and have a home loan that isn’t higher than 125% of your home’s value.

If you don’t qualify for that program, search for refinancing deals from mortgage lenders here.