FHA Loan Short Refinance Program

By Barbara Marquand
Mortgage Credit Problems Columnist

A new "short refinance" FHA loan program offers help to homeowners who owe more on their mortgages than their homes are worth.

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Under this new initiative, which began Sept. 7, 2010, the current lender agrees to write down the mortgage balance to no more than 97.75% of the value of the property so that it can be refinanced with an FHA loan.

This serves as an alternative to foreclosure -- something both lenders and homeowners want to avoid -- and provides government backing to protect lenders against defaults. The new program is in addition to the Making Home Affordable refinance and modification programs.

Here are 5 key points to know:

1. Qualifying for the new FHA loan program

You must be current on your mortgage, owe more than your property is worth and use the home as your primary residence. Vacation homes or investment properties don't qualify. In addition, your loan cannot already be backed by the FHA (FHA already has a streamline refinance program but federal law prohibits principal write-downs). Currently Fannie Mae and Freddie Mac aren't participating in this new program but may get on board. If your mortgage is owned or guaranteed by Fannie or Freddie, then see if you can qualify for the government's Making Home Affordable refinance program, which allows you to refinance a mortgage for up to 125 percent of the home's value.

2. Lender's requirements

Your lender and the company that services the loan must agree to write off at least 10 percent of the remaining principal of your first mortgage, bringing the first mortgage balance to no more than 97.75 percent of your property's value.

3. Meeting FHA loan standards

You must agree to refinance to an FHA loan and meet standard FHA loan underwriting requirements, which include having a credit score of at least 500 and an income that can support the mortgage payments. As with any refinancing, you pay closing costs for the new loan, and, as with any FHA mortgage, you must pay for FHA mortgage insurance. These costs are wrapped into the loan and become part of your monthly mortgage payments.

4. Homes with second mortgages

If you have a second mortgage, the lender for that mortgage must also agree to participate in the program. Together the first and second lien holders must write down the combined principal of your first and second mortgages to no more than 115 percent of your home's value.

5. Impact on credit score

Participating in the program could lower your credit rating because lenders may report to credit bureaus that they let you off the hook for some of the loan principal.

Interested? Contact your mortgage servicer -- the company that collects your mortgage payments -- to see if you can participate.


http://blogs.wsj.com/ / http://www.hud.gov/ / http://portal.hud.gov/

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