Financial Relief for Military Servicemembers

What is the Servicemembers’ Civil Relief Act of 2003?

The Servicemembers’ Civil Relief Act of 2003 (SCRA), which replaced and updated the Soldier’s and Sailors’ Civil Relief Act of 1940, is a federal law that gives members of all branches of the armed forces important rights and protections as they enter active duty. It covers mortgage interest rates, foreclosures, rental agreements, evictions, civil judicial proceedings and income tax payments.

These protections are for active duty military members, reservists and members of the National Guard called to active duty, and, in some situations, their spouses and dependents. To receive protection under some parts of the SCRA the member must be prepared to show that the active military service has had an adverse affect on the legal or financial matter involved.

The Six Percent Rule

The most well-known part of the SCRA is the Six Percent Rule. This provision allows the member to reduce the interest rates on consumer and mortgage debt to 6% under certain circumstances.

This does not happen automatically. The member would have to notify their creditors and lenders in writing and provide a copy of their mobilization orders. Then, the creditor or lender is required to reduce the interest rate on their debts to 6% for the period of time the member is on active duty. The SCRA does not apply to debts that are incurred after the start of the active duty.

The creditors or lenders can take the member to court to fight this. In court, the creditor or lender, not the member, must prove that the member’s ability to repay the loan at the agreed terms has not been “materially affected” by his military service.

Will the forgiven interest have to be repaid later?

No, any interest above and beyond the 6% is forgiven and the member will never have to repay that amount. However, as soon as the member’s active military service has ended, the interest rates will be reset per the original agreement and the payment adjusted accordingly. Also, the member will have to make the regular payments during the active duty to avoid having the account considered delinquent.

There are numerous other protections that a member can receive under the SCRA. To see the entire act please go to www.navy.mil/navydata/policy/hr100-scra.pdf.

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PITI Payment Abatement Program

In my July 2007 article,"Payment Abatement: What the Heck is That?", I wrote about a payment abatement program where the sellers can pay for the interest portion of the buyers mortgage payment for up to the first 6 months of the loan. The buyers were still responsible for the principal payments (if it was not an interest-only loan) and the escrows payments.

Now, on certain Fannie Mae loans, we offer a PITI Payment Abatement Program. For up to 6 months, the seller can pay the buyers entire payment which includes principal, interest, taxes and insurance (homeowners insurance, mortgage insurance, and flood insurance, if required).

Many sellers, and especially builders, are finding that they are having a hard time getting buyers to look at their properties, let alone purchase them. Sellers often offer incentives such as free home warranties, paying points for the buyer, etc. Builders are making even bigger offers to buyers such as free upgrades, free basements, finished basements, etc. I even heard of a builder offering the chance for a buyer to win a BMW SUV!

When these incentives fail to attract the right buyer to the property, the sellers or builders will typically reduce the sales price low enough to attract buyers ahead of other properties. The problem with this is everyone loses. The sellers make less money on the sale of the home. The buyer purchases a home at a low price, thinking he is getting a great deal. However, when this happens, the value of all homes in the community falls, thus, impacting all homeowners in the area, not just the buyer and seller.

Payment Abatement Can Help You Sell Faster

With the PITI payment abatement program, you can advertise your property like this: “Purchase this property and make no payments for up to 6 months!” Do you think that would attract more buyers to your home? Do you think that would give your home the edge over a home that is offering a free TV or home warranty? I think so. A buyer can live in a new home, payment free, for up to a half year. They can use the money they would be sending to the mortgage company toward the expense of decorating the new home instead of putting it on their credit cards. Or, they could make large payment to pay off their other debts. Or, they could invest the money for the kids college? Or... well, you get the point.

The PITI Payment Abatement Program is subject to the following rules:

1. The seller must provide the payment abatement funds.
2. Payment abatement funds are subject to seller concession limits
3. Property must be a 1-2 unit Primary Residence or Second Home
4. Maximum term is 30 Years.
5. Buyers must qualify at the total amount of monthly payment

Example:

Suppose you sell your home for $250,000 and the borrower has a 10% down payment – their mortgage amount would be $250,000. Let’s assume the mortgage is a 30 year fixed rate mortgage with an interest rate of 6.5%; the taxes on the property are $5,000 per year; the homeowner’s insurance is $600 per year; and the mortgage insurance is $97.50 per month. The total PITI Payment for this property will be:

• Principal and Interest $1,519.22
• Taxes $416.66
• Homeowners Insurance $50.00
• Mortgage Insurance $97.50
• Total Monthly Payment (PITI) $2,083.38

If you agree to pay for the buyers PITI payment for 6 months, the total would be $12,500.28, or just over 5% of the sales price of the home.

Most people, in a regular real estate market, sell their homes between 90 – 98% of the asking price. In a slow market, homes typically will sell for less than that. But, if market your home with creative financing such as the PITI Payment Abatement Program, you could walk away with more money, and a quicker sale.

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FHA Bans “Gift” Down Payment Assistance Programs

The Federal Housing Administration (FHA) has written a new rule that will no longer allow down payment assistance from popular programs such as the Nehemiah Program and AmeriDream. As I stated in my blog “Down Payment Assistance Programs” in February of this year, these programs “gift” money to the buyers for the down payment of the home provided the seller agrees to make a donation to the charity in the amount of the down payment plus a service fee. These changes will take effect 30 days after the FHA publishes them in the Federal Register.

Brian Montgomery with the FHA said, “These contributions often function as an incentive to purchase the home. But, these gifts are ultimately paid for by the borrower through a higher mortgage amount. The home buyers are often unaware that the ‘gift’ is something they end up paying for and is not a gift at all.”

Although these programs provide much-needed funds for down payments to otherwise-qualified buyers, the default and foreclosure rate on mortgage with the down payment assistance programs are much higher than for normal FHA mortgages. In 2005, the Government Accountability Office (GAO), the investigative arm of the US Congress, reported that borrowers who receive gifts from these seller-financed down payment assistance programs are more than twice as likely to default and become delinquent than other FHA borrowers and in 2006 the Internal Revenue Service called the charities “scams” and blamed them for increasing the cost of housing for these buyers.

The Mortgage Bankers Association of America (MBA) blasted the new rules. Steve O’Connor, Senior Vice President of Public Policy for the MBA, stated that the programs offer “important assistance to cash-strapped borrowers. O’Connor also said, “While there is a need for stronger quality control measures, we shouldn’t throw the baby out with the bathwater and end the program.”

Both Nehemiah and AmeriDream have filed lawsuits against HUD in federal court seeking an injunction against HUD from implementing these rules. Nehemiah, as a result of a 1998 settlement with HUD, will have 6 months before the rule becomes effective for them. For all other down payment assistance programs, the rule becomes effective October 1, 2007.

I will update my blog as more information becomes available on the down payment assistance programs. Please contact your Senators and Representatives in support of the programs and ask them to block the new HUD rule.

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