FHA Launches Short Refinance Program for Underwater Homeowners

The Federal Housing Administration (FHA) has launched a new refinance option to help underwater homeowners. This program supports borrowers who owe more on their mortgage than their home is worth.

The goal is simple. It helps responsible homeowners refinance into safer mortgage loans.

What Is the FHA Short Refinance Program?

The FHA Short Refinance Program allows eligible homeowners to refinance into a new FHA-insured mortgage. However, lenders must first agree to reduce the loan balance.

Starting September 7, 2010, non-FHA borrowers who are current on their mortgage may qualify. Their lender must write off at least 10% of the unpaid principal balance.

As a result, homeowners gain access to better loan terms and long-term stability.

Who Can Benefit From This Program?

This program targets homeowners whose property values dropped due to market conditions. Many of these borrowers stayed current on payments despite financial pressure.

According to FHA, the program could help 3 to 4 million homeowners by the end of 2012.

Eligibility Requirements

To qualify for the FHA Short Refinance Program, homeowners must meet the following criteria:

• Owe more than the home’s current value

• Be current on their existing mortgage

• Use the property as their primary residence

• Have a credit score of 500 or higher

• Qualify under standard FHA underwriting rules

In addition, the first mortgage lender must agree to reduce the principal by at least 10%. This brings the combined loan-to-value ratio down to 115% or less.

Additional Loan Conditions

The existing loan must not be FHA-insured. The new FHA-insured mortgage must have a loan-to-value ratio of 97.75% or lower.

All lien holders must also approve the refinance. Participation in the program remains voluntary for lenders.

Support for Second Lien Holders

To support this initiative, the U.S. Department of the Treasury offers incentives. These incentives encourage second lien holders to reduce or remove their liens.

Servicers must sign a Servicer Participation Agreement (SPA) with Fannie Mae by October 3, 2010 to take part.

How Homeowners Can Apply

Interested homeowners should contact their current lender first. The lender can confirm eligibility and agree to the required principal reduction.

For complete program details, homeowners and lenders can review the official FHA mortgagee letter.

Source: HUD.gov