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Help For Underwater Homeowners-FHA Short Refinance

In 2010, in an effort to “help responsible homeowners who owe more on their mortgage than the value of their property”, the U.S. Department of Housing and Urban Development (HUD) began a program that allowed lenders to offer refinancing options to underwater borrowers that included a reduction in the principal amount of their mortgage to get it more in line with the current value.

This program, called the “FHA Refinance  of Borrowers in Negative Equity Positions (Short Refi) Program”, has helped only about 4,000 people or so reduce their loan balances, in spite of the fact that when announced in 2010 David Stevens, the FHA Commissioner at the time, testified before the Committee on Financial Services that this program was designed to help some of the “1.5 million borrowers who owe more not their mortgages than their homes are worth..”.

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One of the reasons this program has not been more successful is participation in it by lenders is strictly voluntary so, just because FHA tells a lender they can do this, they don’t have to participate.  Another reason for the lack of success of this program is that the borrowers current lender must be willing to write off 10% of the balance of the loan as their “share” of the loss.  So, while there are challenges and hurdles, the FHA Short Refinance program has helped a few thousand borrowers and, if it helps you, that’s all that really matters.  Time was running out though as the program was set to expire at the end of this year, but HUD recently announced the program has been extended through December 31, 2016.

What are the qualifications for an FHA Short Refinance? (click here for fact sheet)

  • Borrower must owe more on their mortgage(s) than the current value of the property.
  • Borrower must be current on the existing mortgage, or have successfully completed a qualifying three-month trial payment plan.
  • Borrower must occupy the property as their primary residence.
  • Borrower must have a “FICO based” decision credit score greater than or equal to 500.
  • Borrower must qualify for the new loan under standard FHA underwriting requirements.
  • Borrower must not have been convicted within the last 10 years of the following: (a) felony larceny, theft, fraud, or forgery; (b) money laundering; or (c) tax evasion in connection with a mortgage or real estate related transaction.
  • The loan to be refinanced must not be an FHA-insured loan.
  • The existing first lien holder must agree to write off at least 10 percent of the unpaid principal balance.
  • The new loan’s maximum loan-to-value ratio is 97.75% of the current property value and the maximum combined loan-to-value ratio is 115% of the current property value.

How to Apply for an FHA Short Refinance?

  • Contact your existing lender to see if they are participating in the program, or;
  • Contact an FHA-approved lender – You can find a complete list here.
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