New Program May Reduce Mortgage Principal for Underwater Homeowners

The government recently launched a program for underwater homeowners that doesn’t just lower interest rate or extend mortgages, but actually reduces principal.

We’ve all watched as program after program rolls out of Washington for those hapless homeowners who can’t make their mortgage payments. And we’ve all seen or heard stories about people who simply stop paying their mortgage and walk away from their obligations. Where’s the help for the myriad homeowners who continue making payments on a mortgage that exceeds their home’s value? It’s finally here – if you qualify.

According to HUD’s recent press release, The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values. The program – originally announced in March – is designed to help homeowners with negative equity refinance into a new FHA mortgage – one that would be less than the current value of their home.

Unlike previous programs that modify loans by doing things like lowering interest rates and extending mortgages, this one is designed to reduce mortgage balances. In short, qualifying underwater homeowners could once again resurface.

“We’re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined,” said FHA Commissioner David H. Stevens. “This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”

According to research firm CoreLogic, as of June 30, about 23 percent of mortgage borrowers nationwide owe more on their homes than they’re worth. And in some parts of the country, it’s much worse: In Nevada, 68 percent are underwater, in Arizona, 50 percent, in Florida, 46 percent, and in Michigan, 38 percent.

The main problem with the program – one that will prevent many homeowners from making it work – is that bank participation is entirely voluntary. Here are the basics:

Who Qualifies

You might qualify if:

1. You’re underwater: you have negative equity;
2. You’re current on the mortgage to be refinanced;
3. You occupy the home as your primary residence – although if it’s a rental property, it could be up to four units;
4. You can qualify for the new loan under standard FHA underwriting requirements and have a FICO credit score of at least 500;
5. The existing loan to be refinanced isn’t an FHA-insured loan.

As I mentioned above, however, even if you meet all these criteria, both the bank that owns the mortgage and the company that services it will have to agree to reduce the loan until it’s no more than 97.75 percent of the home’s value. They also have to reduce it by at least 10 percent.

What you should do

If you think you’re eligible, first read a more complete description of the qualifying criteria in this HUD document that explains the program in more detail. Then contact the company you make your mortgage payments to monthly (your mortgage servicing company) and ask them about the Short Refinance Program. If they’re participating, and say you’re potentially eligible, they should be able to guide you to the proper paperwork. If they haven’t heard of the program, refer them to this document, issued by HUD to explain the program to lenders.

How much you’ll pay

Refinancing through this program will entail the same closing costs, etc. as you’d pay to take out any FHA mortgage – keep in mind that FHA mortgages require paying mortgage insurance.

Beware your credit

Anytime a lender forgives a loan or part of a loan, that could show up as a negative on your credit history.

If you have a second mortgage

You can still qualify for the program with a first and second mortgage, the lender on the second mortgage must also agree to the refinance, and when it’s complete the combined mortgage debt can’t be greater than 115% of the property’s current value. The government will make some incentive payments for second mortgage lenders that might encourage them to reduce principal.

What about Fannie Mae and Freddie Mac loans?

You heard me say in the video above that loans owned by Fannie Mae or Freddie Mac wouldn’t qualify for this program. That’s because these two quasi-governmental agencies have thus far had policies in place that precluded them for forgiving principal. However, it now seems they’re at least considering it – check out this very recent article from the Wall Street Journal.

Bottom line? It’s nice the know the government is finally tossing a line to people who’ve kept paying their mortgages in trying times, even while underwater. The fact that it’s voluntary for lenders may keep some otherwise deserving homeowners from being brought back to the surface, but with every rescue, the water gets a little nicer for all of us.

Stacy Johnson

It's not the usual blah, blah, blah

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  • Anonymous

    This is not going to help anyone but people who have money and looking for a cheaper montages….if you have all the above qualifications you probably dont need it anyone….Thank God you can send a pray up for God help without qualifications.

  • Anonymous

    Why would a bank do this?

  • I am upset by the opening paragraph of this article. Not everyone who can’t pay their mortgage is a “hapless homeowner” or “just stops paying and walks away”. I am a single parent raising three children. I am employed and I am supposed to receive child support on a monthly basis. However, my hours have gone down to 30 hrs a week and my ex-husband was not paying child support on time and skipped a few months over the summer. Because of this I was not able to pay my mortgage payments on time. I made a payment in June but that was for April’s payment. I could not make a payment in July and the second my May payment hit 90 days past due, they turned it over to their attorney to start foreclosure proceedings. I received one phone call from them 1 day before they sent it. When I called back the next day, they said it had already been turned over to their attorneys and there was nothing they could do and I should move if I can’t afford the mortgage. I had talked to CitiMortgage on a weekly/monthly basis prior to this to update them and explain my situation. Not once did they tell me I could make partial payments. Now I would have to call the attorney’s office. I called the attorney’s office and told them I wanted to make some kind of payment and they referred me back to CitiMortgage. I called CitiMortgage, and they said they could not accept any payments since it was already in foreclosure proceedings. A month went by before anyone even told me I could try to reinstate the loan. I have played their phone games and stall tactics for over a month now. I had $3000.00 dollars which I wanted to put towards my arrearage but at this point another mortgage payment had been added to that, which they wouldn’t let me pay this month, and they added on $3000.00 in lawyer fees! So I went from having a $5200 arrearage to owing $11,000.00 in order to get my loan reinstated. This is unattainable for me. Even if I did get the loan reinstated, I could not afford the additional payment added onto my monthly payment to pay off the balance. I tried to apply for the government modification program and they told me I was not eligible because I did not make enough money and probably because my house has some equity, I believe. At this point they said they can try doing a traditional modification but there is no guarantee. In the meantime foreclosure proceedings continue until I find out whether or not I qualify for the traditional modification and I can’t make any payments in the meantime according to them. I don’t know what else to do at this point.
    So you see not everyone is in the same category, some people are “hapless” and some just don’t pay or don’t want to pay and walk away, but I am not one of those people. I’m trying to save my home but I don’t know if I will be able to.

  • Great qualifications, we were underwater after the height and down to one income during. I tried dealing with the banks, first World Savings, alias Wachovia, alias Wells Fargo. None would help because we were current on our mortgage. Push came to shove. Now we are in Foreclosure and we dont qualify. Love the Hud, the government and mostly the banks. I will rent for the rest of my live and Im 58 yrs old. What Im not paying is going towards retirement.

  • This all sounds good, but how do you know if you have an FHA based loan. My daughter’s original loan was sold to GMAC. How does she find out if she qualifies for refinancing?

  • Refinancing through this program will entail the same closing costs, etc. as you’d pay to take out any FHA mortgage – keep in mind that FHA mortgages require paying mortgage insurance.

  • It’s finally here – if you qualify.

  • This all sounds good.

  • Great qualifications

  • Great information.Thanks for sharing with us.

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