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FHA Short Refinance Mortgage

August 11th, 2010

The FHA Short Refinance mortgage will help homeowners who are underwater with their mortgages and facing a financial hardship. This is another tool in the President’s Making Home Affordable tool box.

To qualify, the borrower must be current with their mortgage and have a FICO credit score of 500 or better. In addition to this, the amount outstanding must be more than the market value of the home. The house must be the principal residence, and the program is only for the first mortgage. If there is a second mortgage on the house, the second mortgage holder will have to resubordinate in order for the first mortgage to register.

The benefit to the homeowner is a mortgage that is insured by the FHA and lower mortgage payments. If there is only one mortgage on the house, the homeowner gets a fresh start with a small amount of equity. It might only be about one percent, but it is better than being negative.

The lender has to make some concessions to make the deal work. The lender has to agree reduce the outstanding balance by at least ten percent. Once the deal is done, the loan to value for the first mortgage can not exceed 97.75 percent. If there is a second mortgage, the loan to value can be 115%.

The incentive for the second mortgage lender is $500 cash for each successful refinance. The key benefits to the first mortgage lender are much greater. He or she now has an insured mortgage on the books.  Risks are reduced and this can only help the bottom line.

There are approximately 13 million mortgages underwater. It is expected that between  500,000 and 1.5 million homeowners will take advantage of this new program. This is just a drop in the bucket. But these are desperate times and every drop of financial aid is a help. The program will be funded to the tune of $14 billion from TARP, and the net economic benefit is projected to be $35 billion.

To be eligible for the program a servicer must sign a Servicer Participation Agreement with Fannie Mae by October 3, 2010.

There are two issues that should be emphasized with the FHA Short Refinance. One, it will have a negative impact on the borrower’s FICO credit score. And two, there is a possibility that the write down of the outstanding mortgage balance will trigger some income taxes payable to the IRS. Therefore, before a borrower signs any documents, a tax professional should be consulted.

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