Loan Modification

FHA Short Refinance Coming Soon

By Gina Pogol

On September 7, 2010, FHA’s latest loss mitigation project goes into effect. This is the FHA Short Refinance program. If you have a loan with a negative amortization feature or just live in an area devastated by foreclosures and plunging home values, you may be able to refinance into an FHA loan and get a principal reduction too. This program is not for those who have problems affording their mortgage and are in trouble; it’s for those who are underwater but otherwise okay. In other words, if you’ve been considering a strategic default, buy-and-bail, or other dirty trick, this program is for you!

To be eligible, your current loan should not be an FHA mortgage (because if it was you’d have been able to streamline refinance without an appraisal or credit check, or you’d be eligible for FHA-HAMP). You have to be current on your mortgage. If not, go directly to FHA-HAMP or other loss mitigation services. You have to be able to qualify for a new mortgage under FHA’s current underwriting standards.

Here’s the scoop:

If you’re underwater on your primary residence, your first mortgage lender must agree to write off a portion of the balance (at least 10%) to get your current mortgage balance down to no more than 97.75% of your home’s current ugly value. If you have a second mortgage, the lienholder must either write off the loan or re-subordinate it to the new first mortgage, and write off enough so that the total of both the new first mortgage plus the old second mortgage is no more than 115% of the home’s current appraised value.

Why would the current lender agree to do this?

Because homeowners nationwide have shown that if their homes are worth significantly less than they owe, they are more than willing to leave their lenders holding the bag. And so getting those loans off the books may be worth the price of taking a partial hit. In fact, FHA was so concerned that lenders might like this deal too much that they prohibited lenders from paying the homeowners’ mortgage for them to make their loans current and eligible for refinancing under the program. That’s how far some might be willing to go to get rid of you! But if you have not missed payments yet, and your credit is still okay enough, and your loan is underwater, look into the short refi program. FHA may make it easier for you to do the right thing.

FHA advises lenders to inform borrowers that short refinancing will have a negative effect on their credit scores, and that they may wish to consult a tax adviser about the tax implications of the debt forgiveness involved.

Full post as published by FHA Mortgage Guide on August 23, 2010 (boomark / email).