The Obama administration is attempting to throw a lifeline to the 25% of American homeowners who are underwater on their mortgages. To help facilitate mortgage refinancing, the FHA has announced a new program aimed specifically at underwater borrowers. Beginning September 7th, homeowners who owe more on their mortgage than the appraised value of their home will be given an opportunity to refinance into a fixed rate, FHA-backed mortgage.
Lenders who agree to participate in the program, which is not compulsory, will be obligated to reduce the principal of the homeowner’s first mortgage by 10% of the unpaid balance.
The FHA short refinance is a unique program that has the potential to help a lot of struggling homeowners. Of course, in order to refinance, underwater homeowners must meet the following criteria:
– Homeowners must be current on their existing mortgage payment,
– Homeowner must occupy the home as the primary residence,
– Homeowner must fully document income,
– Homeowner must have a FICO score of at least 500, AND
– Existing lenders/investors must agree to the 10% principal reduction.
The resultant FHA loan may not have a balance greater than 97.75 percent of the appraised value of the home. The total loan-to-value (including any second mortgages) cannot exceed 115 percent after the refinancing.
It is worth noting that borrowers who participate in the FHA Short Refinance program may see a reduction in their credit score, as they would with any loan forgiveness. The program is being funded by up to $14 billion in TARP funds.
For more information on the FHA Short Refi Program, visit www.hud.gov.