Guidelines Unveiled for Underwater Refinance Program
Details of a new program designed to help underwater homeowners refinance into an FHA mortgage have been released by the U.S. Department of Housing and Urban Development.
The new program, called FHA Short Refinance, will be available for homeowners who are current on their mortgage payments and owe more than their property is currently worth. To qualify, their current lender must agree to write down the balance owed on their current mortgage by at least 10 percent.
A life line for homeowners
"We're throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined," said FHA Commissioner David H. Stevens. "This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product."
The FHA will begin offering the option as of Sept. 7, 2010.
The program represents a new effort by the administration to help financially stressed homeowners reduce their mortgage payments and remain in their homes. For lenders, the program offers an opportunity to recoup most of their money by turning risky loans over to the FHA, though it's not yet clear whether they will embrace the program.
Must be underwater, current on mortgage payments
Guidelines released on Friday specify that to qualify, homeowners must be in a negative equity position (owe more on their mortgage than the home is worth) and be current on their mortgage payments. Borrowers may have previously been delinquent, but are now current on their payments, or may have obtained a permanent loan modification through the Making Home Affordable Program or a private modification through their lender.
Borrowers must meet qualify for the new loan by meeting standard FHA underwriting guidelines and occupy a 1-4 unit property as their primary residence. The refinanced FHA mortgage cannot exceed 97.75 percent of the current home value (loan-to-balance ratio), after taking into account the writeoff of at least 10 percent of the original mortgage.
Secondary liens must be resubordinated
The FHA Short Refinance is available only on first lien mortgages. Any secondary liens must be resubordinated to the refinanced first lien, and the total of all primary and secondary liens may not exceed 115 percent of the current home value. Secondary lien holders will be offered incentives to resubordinate their liens to the new mortgage.
FHA-qualified lenders may not charge higher interest rates or other premiums in return for paying off other debts to qualify borrowers for the Short Refinance or bring their existing loan current in order to qualify.
For non-FHA borrowers only
The Short Refinance is only available to homeowners who do not currently have an FHA mortgage. Other options, such as an FHA Streamline Refinance, are available to current FHA borrowers seeking to reduce their mortgage payments.
The FHA Short Refinance is a new element of the administration's Making Home Affordable Program (MHAP). The MHAP offers another refinance option that allows underwater homeowners to refinance their mortgages at up to 125 percent of their current home value, but which requires lenders and investors to keep the loans on their own books.
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