HUD Launching FHA Refinancing for Underwater Mortgages
The Federal Housing Administration will launch a program on September 7th that will allow underwater homeowners who are current on a non-FHA loan to refinance into an FHA-backed loan when their lender agrees to write off at least 10 percent of their principal. The FHA Short Refinance program, originally announced in March, is designed to help homeowners in markets that have seen large declines in home values refinance into “a safer, more secure” mortgage, FHA Commissioner David Stevens said in a statement
HUD recently announced changes to the FHA mortgage loan program to assist homeowners with mortgage loans that exceed the value of their home. The changes are part of broader efforts to assist homeowners that were announced by the Obama Administration. Previously, Obama’s mortgage relief team had announced that by the Fall, they planned to revise FHA guidelines with additional changes to the FHA loan programs. Their goal is to offer a FHA refinance loan option for borrowers who have made their loan payments on time but owe more than their home is worth.
In Mortgage Letter 2010-23 HUD sets forth the details regarding the FHA short refinance alternative. The option will be available for loans with case numbers issued on or after September 7, 2010 and closed on or before December 31, 2012. However, HUD advises that the loss coverage that will be part of the refinance option will use funds under the Emergency Economic Stabilization Act of 2008 (EESA), and that if availability of the loss coverage is delayed beyond September 7, 2010 the implementation of the loss coverage also will be delayed. Supplemental Directive 10-08, issued under the Making Home Affordable (MHA) Program in conjunction with Mortgagee Letter 2010-23, provides additional guidance for investors and servicers. The Supplemental Directive notes that the FHA refinancing is not yet effective and a subsequent Supplemental Directive will be issued when the program is operational and servicers can executed a Commitment to Purchase Financial Instrument and Servicer Participation Agreement (SPA) or a Service Schedule to the SPA, as applicable, with the U.S. Department of Treasury.
FHA Short Refinance Eligibility- The refinance option is available for homeowners with a non-FHA mortgage only if the following conditions are satisfied:
- The homeowner must be in a negative equity position. (mortgage balance must be greater than the property value)
- Borrower must be current on their current home mortgage loan.
- The homeowner must occupies the home as their primary residence and the home consists of one to four units.
- Borrower must qualify under standard FHA underwriting requirements and have a “FICO based” decision credit score of at least 500.
- The existing first lien mortgage loan holder must write off at least 10% of the unpaid principal balance.
- The FHA refinance loan may have a maximum loan-to-value ratio (LTV) of 97.75%.
- Second mortgage loans that are not extinguished must be re-subordinated and the combined LTV (CLTV) with the FHA refinance loan may not exceed 115% LTV.
- For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) or that are manually underwritten, the homeowner’s total monthly mortgage payment for the FHA refinance loan and any subordinate mortgage loans may not exceed 31 percent of the homeowner’s gross monthly income, and the total monthly debt payments of the homeowner may not exceed 50% of such income.
- Premium pricing may not be used to pay off existing debt obligations to qualify the homeowner for the FHA mortgage.
- The mortgagee may not make mortgage loan payments on behalf of the homeowner or otherwise bring the existing loan current to make the homeowner eligible for the refinance option.
- The existing home loan holder may not have brought the existing loan current, other than through an acceptable permanent loan modification.
- For a homeowner with a loan that was permanently modified under the Making Home Affordable Program (HAMP), the FHA refinance loan may not close before the month that follows the month in which the modification became permanent. For a homeowner with a non-HAMP permanent modification, the homeowner must make at least three monthly payments on time and the modified loan must be current for the month due. If a homeowner is in a temporary or trial modification period, the homeowner is not eligible for an FHA refinance loan under the program.
