HUD Announces Possible Principal Reduction: The “FHA Short Refinance”

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HUD has been busy!  They just issued another press release stating that starting September 7, 2010, FHA will offer "certain 'underwater' non-FHA borrowers who are current on their existing mortgage and who's lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA insured mortgage".   This program will be available on FHA case numbers issued on or after September 7, 2010 and must close before December 31, 2012.

The biggest catch that I see is that this voluntary program requires that all mortgage lien holders consent to the refinance.  Any first mortgage being paid off must agree to reduce their principal balance by a minimum of 10% and the second mortgage must agree to be subordinated.   There's a maximum combined loan to value limit of 115%.  It will be interesting to see how the banks embrace this program.

Here are some other requirements for the FHA Short Refinance:

  • the home owner must have negative equity
  • the home owner must be current on their existing mortgage that's being refinanced.
  • owner occupied (primary residence) only
  • the mortgage being refinanced may not be an FHA insured loan (NOTE: if you're upside down on your FHA insured loan, you can do a streamline FHA with no appraisal).
  • existing lien holder must write off at least 10% of the principal balance
  • first mortgage maximum loan to value is 97.75% for the new FHA loan and 115% combined loan to value when there is a second mortgage.

Potential borrowers of this program will be subject to "Borrower Certification" which was enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010.  If the borrower has been convicted in the last ten years of any of the following: (a) felony larceny, theft, fraud, or forgery; (b) money laundering; or (c) tax evasion.  More details are expected to follow.

Last but not least, the Mortgagee Letter advises that borrowers need to be aware that, as with any loan forgiveness action, short refinancing under this program may be reflected as a negative feature on a borrowers credit score and that anyone who is considering this type of transaction should contact their tax advisors regarding the cancellation of debt and possible tax consequences.

It will be interesting to see how many banks will participate in reducing principal balances and how this will work with the Home Affordable refinances.  This could be a nice resource for home owners who don't have Fannie Mae or Freddie Mac securitized mortgage but want to take advantage of our current historic low interest rates.

Stay tuned…I'll keep you posted.

 

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