Most of the time when a home is purchased, it is done with the hope that the home will either be a residence, or will be a great investment. Usually, people hope for both. Unfortunately, this isn’t always the case. Because the real estate market is an economic market like any other, the home values are constantly ebbing and flowing, sometimes dropping dramatically over the course of just a couple of weeks. Typically real estate is a bit more stable than this, but drops do happen so instead of seeing the equity in the home go up, homeowners are sometimes left watching it drop until they are upside down in the mortgage. This is especially painful if your percentage rate is above current interest rates offered by the Federal Housing Administration. Having an upside down mortgage is an experience that no homeowner ever wants to have. If you’ve found yourself dealing with this, there is a solution to that problem. This solution is called an FHA short refinance.
Types of Refinance
The Federal Housing Administration program has a few different refinance programs. The first is a standard refinance, where the home has gained in equity and the homeowner is redoing the loan hoping to pull the equity out and use it in other investments, or to improve the property. A second is the streamline refinance, which is a refi option specifically designed for homeowners that have an existing FHA backed mortgage. The streamline option offers them a regular refi without all the time and paperwork involved with traditional options. It just makes it easier. The third option is the FHA short refinance, which was created for people who end up underwater on their mortgage, which just means that they owe more than the home is worth.
When a traditional refinance is approved, the lender is looking at making a good payback from that investment. You will be paying interest on the increased dollar amount, which means more money coming in to the lender. With an FHA short refinance, things operate a little differently. Rather than giving you money and an increased loan, your lender will actually reduce the loan value to no more than 97.5% of the value of the home. This means your lender is potentially losing money, but it also means that you are less likely to default, which is why some lending institutions are willing to do it.
In order to get approval for this type of refi, you have to get all parties to agree that it is the best course of action. Your lender and any lien holders will need to sign off on this before you can be approved for the next step, which is the reduction of your loan. Bear in mind that this option isn’t available for any homeowner looking for a handout. You will be required to be current on all payments before you will be considered, so if your loan is already in default you may not be able to qualify. However, if you are still in good standing with your lending institution, the possibility is open to you. In addition to being current on your payments, you will need to meet the other requirements put out by the Federal Housing Administration for approval on any refinance, and your credit score will have to be at least 500. If you are approved for an FHA short refinance, you will typically be approved at the current interest rates that the government program is offering.
What About a Loan Modification?
When a loan starts to go south on a person, they begin looking at all of their options. Some think about refinancing, others look for a loan modification. Both of these options can be beneficial, but for underwater loans you’d be wise to compare the two. A modification basically enables you to alter some of the terms of the loan, making it easier for you to make the monthly payments and to pay down the loan. This may include adjusting the interest percentage rate or the life span of the loan. A short refi is different because it is considered a completely new loan. You rewrite the terms of the first loan, creating a new loan which you then take ownership of. Because of this you can frequently get better terms than you had on the previous loan. Both options have their pros and cons so it’s wise to consider the advice of a professional before you decide on your specific course of action. The goal in the end is to get you back on top of your underwater mortgage, and with the Federal Housing Administration refinance programs, you may be able to do it.