Recently, the option for a 125% refinance became available. In prior years, the maximum amount was 105%, but with the housing values dropping so much and with so many people now owing more than their home is worth, the rules were changed. There are several exceptions and specifications to this new refinance, which will be discussed in this article.
One of the most important things to keep in mind about this type of refinance is that it is intended only for those who are experiencing true financial hardship. People, who have lost their jobs, are receiving medical treatment for an extended illness or any other dire circumstances are the best candidates. This refinance option is not available for taking out cash or money to pay for a wedding, funeral or remodeling a home.
These loans are backed by Freddie Mac and Fannie Mae, which are government funded. The new rules for 125% refinance were approved by President Obama to help homeowners who are in distress and in danger of losing their home. Since most housing values have dropped, many people are now facing paying more than their home is worth and are unable to meet the monthly payment.
The cost of living increasing, the decrease in job raises and the housing prices are enough to make many homeowners apply for these refinances. The rates are fixed and the lender requires a lengthy process to verify hardship. There is a limited amount that these companies have to offer, so they're very strict in their criteria. The goal of this idea is to keep the housing market from plunging and to keep some homeowners off the streets.
These loans are also commonly called an underwater refinance. This is because they're sought by people who are metaphorically “under water” by owing more than the home is worth. In order to qualify, applicants must have a decent credit score and history. A solid history of home payments will help also.
One of the most important things to remember is that the 125% refinance is likely only going to be available for a limited time to homeowners whose loans are owned by Fannie Mae or Freddie Mac. Since these loans are backed by the government, the loan terms are reasonable and guaranteed. The option is available in lengths of 25 or 30 years. Borrowers who choose the 25-year option are also offered an additional discount on fees for selecting the shorter program.