How to Modify an 80/20 Mortgage

An 80/20 mortgage is actually two mortgage loans allowing 100 percent financing for home purchases. A first mortgage is issued for 80 percent of the purchase price and a second mortgage for 20 percent, eliminating the need for a down payment. The loans are considered controversial because with no money down the borrower usually has little or no equity in the home at closing. Falling property values, because of a housing bust or recession, can lead to the borrower owing much more on the house than it is worth.

Instructions

1

Hire a licensed home appraiser to determine the fair market value of your home, or ask a real estate agent to offer an estimate based on similar homes recently sold in your neighborhood. Refinancing your 80/20 mortgage will be difficult or impossible if the home is worth less than what you paid for it. For example, the original purchase was $200,000 with a first mortgage for $160,000 and a second for $40,000. Two years later you still owe $195,000 on the mortgages. Meanwhile property values have sharply declined and the home is worth only $150,000. This leaves you with negative equity of $45,000, also referred to as being "upside down" on the mortgage.

2

Check your credit report and score by viewing and printing it from AnnualCreditReport.com. It's the only website specifically authorized by the Federal Trade Commission to offer free reports under the terms of the Fair Credit Reporting Act. Order your credit score separately for a fee. Refinancing will also be difficult or impossible if your credit score is below 620 -- generally the cut off for standard refinancing at a competitive interest rate. Scores of 720 or higher are preferable.

3

Apply for a new loan to eliminate the 80/20. Apply through the mortgage company for your first or second mortgage or select a different lender. Add cash to the deal if you are upside down on the mortgage or lack sufficient equity for approval. For example, the balance due on your mortgage is $200,000, and the house is appraised for the same amount. Add $40,000 cash to the refinancing to create 20 percent equity. Lenders generally like for home owners to maintain at least 20 percent equity, with many home purchases requiring a 20 percent down payment.

4

Delay your refinancing if your credit score is poor or you lack sufficient equity and can't afford to add cash to the refinancing. Contact a housing counselor certified by the U.S. Department of Housing and Urban Development to determine if you may be eligible for a special loan modification based on financial problems. Some lenders offer special foreclosure-avoidance loan modifications for people who clearly are in danger of losing their homes because of financial problems. You must be at least one payment behind to qualify. Find a housing counselor in your area by contacting a local charity such as the Salvation Army or United Way. Loan modifications by lenders allow all the terms of your loan to be changed, including consolidating the loans into one mortgage. The housing counselor can initiate discussions with your lender if you are eligible.