New Program May Reduce Mortgage Principal for Underwater Homeowners

Photo (cc) by seanmcgrath

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.

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