If you are underwater on your mortgage you may be looking for refinancing options that can help you solve this problem. For those homeowners who experienced major financial upheaval because of the economic downturn recently, there is a solution that may be worth considering. That solution is the FHA short refinance. It is part of the Obama administrations Making Home Affordable and is a way for you to take advantage of interest rates today despite the fact that you owe more than the home is worth.
Benefitting From the FHA Short Refinance
To put it simply, the FHA short refinance basically took the concept of the short sale and the refinance and combined them. Unlike a short sale, however, when you do this particular refinance you do not have to worry about losing your home. That is the purpose; to make it possible for more homeowners to keep their homes rather than defaulting on loans that are too big.
With the FHA short sale the lender and the homeowner decide to reduce the mortgage amount so the lender actually agrees to forgive a certain amount of debt. When all is said and done the typical mortgage is supposed to be around 97.5% of the value of the home. This is phenomenal for homeowners who prior to the FHA short refinance are looking at major debt in their mortgage that they don’t know how to solve.
Of course, this is an action that isn’t free of consequences. The lender will have to report to the credit bureau the activity that was taken on your mortgage, so your credit may suffer a bit, but to have it drop a few points as opposed to losing the house entirely is a trade off that is well worth it. And if you are wondering why the lender would be willing to forgive part of the debt, the answer is because it secures the lender against further financial loss.
Qualifications and Loan Eligibility
Before you can be approved for this refinance, you have to first meet the qualifications for eligibility. Keep in mind that this program is set to expire at the end of 2014, so it is a temporary fix that you’ll need to take advantage of now if you want to utilize it. The first requirement is that the loan you currently have be controlled by a conventional lender, so FHA insured loans are not applicable. You must also be current on all home mortgage payments. Or, if you are not, then you’ll need to complete a trial period of three months. During the trial period you will make the payments in the amount that the new loan will be. If you successfully complete the trial period you increase your chances for approval.
A couple of other requirements include the primary residence, credit score, and criminal record. The home you are trying to get a short refi on must be your primary residence and you do have to have a credit score of at least 500, preferably higher. In addition to this, the FHA has a specific set of underwriting guidelines that their lenders follow; you need to be able to meet those underwriting criteria. And, of course, you need to have a clean criminal record.
The requirements mentioned above are those that you, the borrower, have to meet. But there are other requirements that have to be met by the loan and the lender. First of all, the amount of the mortgage to be forgiven has to be at least ten percent, sometimes more. This amount will come off of the loan, but it won’t apply to any liens that may be on the property. If there are second liens on the property you will need to discuss your options with your lender, as they may be able to be reduced or removed. It is also required that the final loan amount be no more than 97.75% of the value of the home and if there are second liens that you are unable to have removed, these liens, when added to the first mortgage, can’t be more than 115% of the value of the home.
The short refinance is not a perfect solution to a big problem, but it is a better solution than short selling or foreclosure. The reduction in the loan value can and often is the reason many homeowners are able to stay in their homes instead of defaulting. And, because it is a refinance, you may be able to reduce your interest rate as well, which is another way to save thousands and regain control of your home mortgage.