FHA refinancing and underwater homeowners

By Michele Lerner
Mortgage Credit Problems Columnist

If you're underwater on your home, an FHA loan program called the "Short Refinance" may make your mortgage payments more affordable.

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An FHA Short Refinance can be a particularly good option for homeowners who currently have a bad credit mortgage loan with a high interest rate. If you have little or no equity in your home, it can be almost impossible to qualify for bad credit mortgage refinancing. Even if you have improved your credit since you took out your current mortgage, without equity it can be difficult to refinance.

Lenders are being encouraged to forgive at least 10 percent of the balance still owed on the original loan so that homeowners can begin to rebuild their equity. The new FHA loan must have a balance less than the current value of the home, up to 97.75 percent of the home value. If the homeowners have a second mortgage on the property, the combined debt of the FHA loan and the second loan must not exceed 115 percent of the current home value.

Eligibility for FHA refinance

If you have a non-FHA loan currently, you can still refinance with the FHA Short Refinance program. Homeowners must meet standard FHA loan requirements in order to qualify for an FHA Short Refinance:

  • Homeowners must be current on their existing mortgage payments.
  • The property must be the homeowners' principal residence.
  • All income must be documented.
  • Borrowers' credit scores must be at least 500.

Effect on your credit score

Be aware that if you take advantage of this program and have some of your mortgage debt forgiven, it may have a negative impact on your credit score. It is important to weigh that disadvantage against the advantage of lower payments and the opportunity to regain some home equity.

Homeowners who want to know if an FHA Short Refinance is right for them can contact lenders directly or fill out an online form to begin comparing mortgage quotes.

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