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If your home is underwater (you owe your bank more than your home is worth) and you are struggling to meet your monthly mortgage payment there is a new loan product on the horizon that could save your home. Beginning September 7th, 2010, the Federal Housing Administration is introducing the "FHA Short Refinance" program. The new loan product is targeting homeowners who are somehow managing to pay their mortgage on time, but saw a large drop in their home's value. This new program requires banks to write down at least 10 percent of the unpaid balance on your first mortgage. The program starts September 7, 2010 and is scheduled to end December 21, 2012.
You must be current on your mortgage and your lender must be willing to write off at least 10 percent of the original first mortgage, The big hitch to this program (which will cause it to fail) is that you must have the consent of your current mortgage lien-holder. So, if your lender refuses to participate, you won't be able to take advantage of this refinance option. According to the Obama administration they see this program as a life line to those families who are current on their mortgages but are experiencing financial hardship because property values have declined. It is a tool for families to overcome negative equity with respect to their home mortgages, offering a safer and more secure mortgage product.
Qualifications for this program:
1. Your existing mortgage is in a negative equity position;
2. You must be current on your mortgage;
3, You must occupy the property subject to the mortgage (one of four units must be occupied) as your primary residence;
4. You must have a FICO score greater or equal to 500;
5. Your existing home mortgage is not currently an FHA-insured mortgage;
6. The existing lien-holder must agree (voluntarily - please stop laughing and continue reading) to write off at least 10 percent of the unpaid principal balance on the mortgage;
7. The refinanced FHA-insured mortgage must have a loan-to-value ratio (after closing on the loan) of no more than 97.75% (if you are confused than you are in good company. Wasn't this supposed to be for underwater mortgages? How can they require a loan-to-value ratio of 97.5% and require that you are under water?);
8. If you have a home equity loan it must be re-subordinated (remain in second position behind the new FHA mortgage) and the new loan may not have a combined (first loan and second loan) loan-to-value ratios greater than 115% (so this program really only has value to those who have multiple loans on their homes);
9. Your monthly mortgage payment, including the first and second mortgages, cannot be greater than 50% of your gross monthly income;
10. This new FHA loan cannot be used to pay off existing debt obligations in order to qualify for the loan;
11. If your existing mortgage is a balloon mortgage, the balloon period must be more than 10 years.
If you have already gone through a loan modification, under the Making Home Affordable Modification Program, you may still qualify for these new FHA loans. If you have gone through a loan modification, not under the Making Home Affordable Modification Program, but under a voluntary arrangement with your existing lender, then you are required to make at least three on time mortgage payments, under the voluntary modification, in order to qualify for this new FHA loan. For each FHA loan provided under this program, a lender will receive $500 from the FHA.
About this Author
Tom is a Certified Public Accountant, a Certified Financial Planner, CLTC (Certified Long-Term Care) and President of Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works with clients helping them manage their money, retirement planning, college savings, life insurance needs, IRAs and qualified plan rollovers with an eye towards maximizing tax benefits and minimizing taxes. Tom is founder of the Rich Habits Institute and author of "Rich Habits".
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