If you have an upside down mortgage, a short refinance through FHA loans will allow federal lenders to help your negative equity situation. Lenders can help you get a new federal loan after agreeing to a short payoff. This can be a bit risky for both you and the lender. The reason being is because this can hurt your credit score, and this hurts the lender’s chance at profitability. However, this can prevent you from foreclosing and the lender doesn’t lose as much if you had to foreclose. Here are are some things to know before you decide to refinance.
Requirements of Short Refinance Through FHA Loans
Before processing a federal short refinance, you’ll need to fulfill these requirements. Just like all federal refinance choices you can only refinance if the property is your primary residency. The best way to find out is through a lender or going to a federally approved website that will have the correct information regarding residency requirements. Of course, you need proof that this is a negative mortgage. Pretty much if your property is worth less than your mortgage, it’s in an upside down type of situation. Even if your home may be in this situation, you still need to have a great mortgage record. Lenders already deem the situation as risky, so you need some kind of documentation to show that you can keep up with regular payments. Another stipulation is your home must not be currently refinanced through the federal government. You need your current lender to write off at least 10% of your existing mortgage. Also, you have a maximum loan to value ratio of 97.75% for your new loan amount. In 2010, HUD stated that a credit score of 500 is needed to acquire this plan. However, if the homeowner did not have this in place, he must explain the negative equity situation in writing.
Why is This Such a Difficult Refinance to Accept for Lenders?
All types of refinancing take time no matter if it’s from a conventional loan or a federal loan. However, a lot of lenders are skeptical with this because it hurts their own finances. Instead of you paying back with interest or using equity as a collateral, they essentially give you equity and they give you lower mortgage rates. This makes things a lot less appealing. You have to seriously convince your lender in letting you borrow more money. It’s honestly a back and forth conversation that may lead up to no where. It’s almost like going on a long trial with numerous delays. It just gets no where and there’s no guarantee that you’ll be vindicated. In this case, vindicated means not having to foreclose on the property.
What Are Some Repercussions If You Do Acquire This FHA Financing?
You have to really measure what you get out of a short refinance through FHA loans. Sure, it helps you save your home, get lower rates, and add a bit of equity. However, you’ll receive a crazy drop in your credit score. This can severely affect your livelihood in making purchases, getting a new vehicle, or using credit towards another service. A low credit score is something that you cannot hide, and it takes a while to build back up especially after a dramatic drop. Also, you may have to get in contact with your tax adviser because the refinance can show up as a tax implication.
Are There Any Alternatives?
If you don’t want to use a short refinance through FHA Loans, HARP may be a good choice in the matter because your LTV can be as high as 150%. However, you need to talk to your lender about your eligibility. Also, it wise to go online and see if you can acquire a Freddie Mac or Sallie Mae loan. You need to be under either of these services to get approved. Go to the website and fill out the form and see if a representative of these loan services can help you on your way to getting accepted if you believe a short refinance is way too time consuming. Try your best to find multiple solutions before you consider the last option.
A short refinance through FHA Loans is a great option if you’ve really run out of choices and don’t want to foreclose. It’s very risky because there are no guarantees. You don’t want to end up being homeless and not having a back up plan. If you have a good relationship with your lender, it might be a bit easier but you never really know. Also, you could wind up in a situation that takes 4-5 months to clear with a major drop in your credit score.