Loan Modification

Refinancing an Underwater FHA Mortgage

By Gina Pogol

FHA has a simple solution to the my-house-is-under-water-but-I-wanna-refinance problem. They’ve always had it. It’s called a streamline refinance, and you probably qualify to get one. It’s not a slam dunk — before some changes in November 2009, you could pretty much get a streamlined refi if you could fog a mirror, but today you have to have a decent payment history on your loan.

The New Rules

FHA allows you to refinance your mortgage without an appraisal (so the fact that your house’s value has dropped like a piano from the roof is irrelevant) if you meet certain guidelines.

1. You have to have made at least six payments on your current FHA loan.

2. If you’ve had your mortgage for less than a year, all the payments must have been made on time. If you’ve had it for more than a year, you can have been late only once in the last 12 months and must have paid on time the last 3 months.

3. Your new payment must be at least 5% lower than your old payment, or you must be replacing an ARM with a fixed loan (the new rate can’t be more than 2% higher) or hybrid loan (the new payment can’t be more than 20% higher), or reducing the term of your mortgage, or dropping your interest rate by at least 2% (if replacing a fixed mortgage with an ARM).

4. The property must be your primary residence.

5. You have to pay your closing costs upfront (except your mortgage insurance premium (MIP).

Here’s an example. Bob has a $200,000 30-year fixed FHA mortgage at 6%. His loan is 12 months old, and he’s made all of his payments on time. What interest rate would he have to get to be eligible for a refinance? A look at an amortization schedule shows that he still owes $197,544, and his current payment is $1,199. To qualify for a new 30-year loan, he needs to reduce the payment by 5%, which would mean a new payment of  $1,139. So he runs some numbers through a mortgage calculator and sees that to get this new payment, he’d need an interest rate of 5.64% to get a payment of $1,139. But what if he wants an ARM? He’d need to get a rate of 4% or less. So, as long as he can get a new interest rate of 5.64% or lower on a new 30-year loan, Bob can refinance his underwater FHA mortgage.

Full post as published by FHA Mortgage Guide on February 25, 2010 (boomark / email).