The FHA Refinance of Borrowers in Negative Equity Positions is a new program, effective September 7, 2010, designed to help people who are upside down in their current home loans. This blog article will summarize the FHA refinance program which can be downloaded from our resource center at the Tallahassee Real Estate Blog.
Passed in March of 2010, a combined effort from HUD and the Department of the Treasury allows borrowers who are current on their mortgage to qualify for an FHA refinance loan provided that the lender or investor writes off the unpaid principal balance of the original first lien mortgage by at least 10 percent. Considering the Tallahassee housing market has seen values drop roughly 30% since the peak of the market, this could provide some relief for Tallahassee home owners who are current on their mortgage payments.
In order for a borrower to qualify for the FHA refinance program, the following conditions must be met:
- The homeowner must be in a negative equity position;
- The homeowner must be current on the existing mortgage to be refinanced;
- The homeowner must occupy the subject property (1-4 units) as their primary residence;
- The homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a “FICO based” decision credit score greater than or equal to 500;
- The existing loan to be refinanced must not be a FHA-insured loan;
- The existing first lien holder must write off at least 10 percent of the unpaid principal balance;
- The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent;
- Non-extinguished existing subordinate mortgages must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;
- For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, the homeowner’s total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income;
- FHA mortgagees are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan;
- FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance; and
- The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification.
FHA Refinance Program
This new FHA refinance program is expected to help a lot of people. In fact, it is estimated that between 500,000 and 1,500,000 borrowers will refinance using these enhancements and the net economic benefits will be between $11 and 35 billion. Of course, when the government tells us that there are economic benefits, we must also assume that they will be "paying the bill" for these benefits.
These benefits come with a warning label: Anybody utilizing this program needs to be aware that the short refinancing under this program may be reflected as a negative feature on a borrower’s credit score. Additionally, borrowers should consult with their tax advisers regarding the cancellation of debt and possible tax consequences from this FHA refinance of their home mortgage loan. A 6 page letter was published in August 2010 by HUD explaining the entire program, and can be downloaded from the following link: FHA Refinance Program Letter.
Information About The FHA Refinance Program
If you or a family member is upside down on a loan, I would encourage you to download the full guidance letter on the FHA Refinance Program and determine if it makes sense under current conditions. Each and every home owner is different, but I would think reducing principal on a home loan is a good idea for many, many people.
Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.