As promised here’s the scoop on the final details of the two new mortgage-assistance plans launched by the Obama administration. 

I am going to run through  everything here, in case any of you missed the earlier Scoop where I explained the initial details of the plan. On March 4th the Treasury department presented the final details. So now we know what is what.

The program is actually two separate plans: one for helping homeowners who are in decent shape but would benefit from refinancing to a lower mortgage rate, and one for helping qualified homeowners whose current mortgage is unaffordable and puts them at risk of default and foreclosure. Let’s walk through how each works.

The Refinancing Program

Aimed At: Homeowners who are managing to keep up with their mortgage payments, but don’t have enough home equity to qualify for a mortgage refinance. Lenders typically won’t approve a refinance today unless you have at least 20% equity in your home. That’s a steep hurdle for many homeowners who bought in the past few years with low or no-down payment mortgages and now have seen their home values fall.  Under this plan if your finances are in otherwise decent shape-a solid credit score and paycheck-you will be eligible to refinance even if you have no equity. In fact, you may be able to refinance even if you are 5% underwater; meaning your current loan amount is 5% more than the current market value of your home. The refinance is into either a 15-year or 30-year fixed-rate loan at the prevailing market rate. Right now that’s a super-low 5.17%. Once you refinance that rate is permanent for the life of the loan. There are no adjustments. Ever.

The Obama administration says this program could help up to 5 million homeowners who have been shut out of refinancing because they lack the 20% equity lenders insist on these days.

The Nitty Gritty: The administration hopes all lenders will follow this plan, but right now it is only required for lenders whose mortgages are owned or guaranteed by either Fannie Mae or Freddie Mac.  The program is only for “conforming” loans; that’s typically a max of $417,000 though it can be up to $729,500 in high-cost areas. If you have a jumbo mortgage above your area’s conforming loan limit this program doesn’t cover you.

It may take a few weeks for lenders to be able to close loans under this new program, but get hopping now on working with a lender to prep your loan application. Here’s what you’ll need to have ready:

• Income verification. Your most recent pay stubs if you receive them or documentation of income you receive from other sources.
  
• Your most recent tax return.
  
• Documentation of any second mortgage. (You may still be able to refinance your primary mortgage if you have a second mortgage; but it will require coordination with the second-mortgage lender.)
  
• Payments on each of your credit cards if you are carrying balances from month to month.
  
• Payments on other loans such as student loans and car loans.

The Loan Modification Program

Aimed At: Homeowners who don’t qualify for the refinancing program explained above. This includes homeowners who are more than 5% underwater, or are already in default on their mortgages or at risk of default. I want to stress that last point: No longer do you have to be in default to qualify for a modification; the program is in fact designed to help millions of homeowners before they miss payments or are in default. This is such a welcome change in policy; prior to this announcement lenders typically wouldn’t talk modification with you unless you were already behind in payments. Now they will reach out and work with qualified borrowers before they get behind. Proactive, not reactive. That’s what I like to see.

The Nitty Gritty: The home must be your primary residence and only “conforming” Fannie and Freddie mortgages ($417,000 or less typically; or up to $729,500 in qualified high-cost regions) are covered by the Administration’s plan. That said, it is expected that other loans will also become eligible as lenders will want to participate so they can collect the financial incentives offered by the federal government (more on this in a second.)  While the refinancing program is limited to borrowers who are no more than 5% underwater, the loan modification program does not have any limit for how underwater you may be. I want to repeat that, for it is a change from the initial announcement. There is no cutoff based on how underwater you are.

Now that doesn’t mean everyone who is deeply underwater, or way behind on payments will automatically qualify for help. You still need to be able to afford the payments.

Here are the basic qualifying rules for the loan modification program:

• Your loan must be less than $729,500.
  
• You must live in the property. (no investment properties are covered.) You must be ready and willing to fully document your income (your most recent tax return and at least two current pay stubs are required.)
  
• You must sign an affidavit (the lender will provide) that states you have a financial hardship.
  
• If your total household debt-including other loans, credit card balances and alimony payments-total more than 55% of your income you must agree to sign up for financial counseling.

Then it’s up to the lender to figure out if you are a good candidate for a loan modification. The basic idea with this program is that lenders will agree (with incentives from the Administration) to reduce the interest rate on qualified loans to as low as 2% in an effort to reduce your payments so you can afford to stay in your home. The way it will work is that lenders will size up your monthly debt-to-income ratio (DTI). The lender has to agree to reduce your interest rate to a point where your DTI is no more than 38%. Then the government jumps into the picture and will agree to pay half of the cost of having the lender reduce the payment even further to get you down to a more manageable 31% DTI.

The low loan rate is good for five years. Then it will gradually increase-no more than one percentage point a year-to a permanent fixed rate loan tied to today’s prevailing rates. That’s a low 5.17%. I want to be clear: your permanent rate isn’t the prevailing rate five years from now (2014). If you qualify for this loan modification you will lock in a maximum permanent rate based on today’s fixed rate: about 5.17%. So you might see your rate pushed as low as 2% right now to help you, but five years from now when the rate starts “adjusting” the max it will hit is today’s prevailing fixed rate of 5.17%.

If the rate reduction doesn’t get you down to the target 31% DTI, the lender can consider extending your loan term to 40 years to lower the monthly cost you pay, and can also consider “principal forbearance” where it stops charging interest on a portion of your loan amount for a set period.

The modification plan also comes with some “incentives” for both lenders and borrowers.

Lenders  will get a $1,000 payment for each loan modification. The lender will also receive a monthly bonus if the borrower stays current on the loan; that incentive can be as much as $1,000 a year for three years. Borrowers will also be eligible for monthly incentives if you keep up with your payments. The value of the borrower incentive can be up to $1,000 a year for the next five years. The borrower bonus is applied directly to paying off your mortgage principal. So if you get the modification and stay on time with your payments over the next five years you will have a total of $5,000 knocked off of your mortgage principal.

As with the refinance program, it may take lenders a few weeks to get set to process the loan modification program; in the meantime you can start pulling together your loan documentation. To learn more about how each program works, please read this official release from the Treasury Dept.