Short Refinance: Is the Government’s FHA Short Refi Program for You?

September 7, 2010 (FreeRateUpdate.com) – Another day, another week and another program is now available to help the struggling housing market and underwater borrowers. Back in March, the Department of The Treasury and the Department of Housing and Urban Development announced additional enhancements to the Making Home Affordable Program and the FHA refinancing program. These enhancements went effective today and are designed to help borrowers who currently owe more on their mortgage than the value of their home. Since there are guidelines for this latest enhancement, borrowers need to first find out if the government’s FHA short refi program is for them.

Borrowers must be current on their existing mortgage in order to even consider applying for the FHA short refi program. As the subject property must be occupied by the borrower as their primary residence, this program is not available for second homes or investment properties. The existing mortgage that is being refinanced cannot be an FHA insured mortgage although the borrower now must qualify for the FHA short refinance using the standard FHA underwriting guidelines including a minimum credit score of 500 or above.

The FHA short refinance program is really a reduction in principal program. The current first lien holder must be willing to write off at least 10 percent of the unpaid principal balance of the mortgage so that the refinanced FHA insured mortgage has a loan to value ratio of no more than 97.5 percent. In addition, any second lien holders must agree to re-subordinate. The new loan, which includes the first and any second liens, may not have a combined loan to value ratio above 115%.

When qualifying for the FHA short refinance program, for any borrowers who receive a refer decision or any applications that require manual underwriting, the total monthly mortgage payment, including second mortgages, cannot be greater than 32 percent of the gross monthly income and the total debt cannot be greater than 50 percent of the gross monthly income.

In order to help the success of this program, the Treasury will provide incentives to second lien holders who participate and agree to full or partial reduction of liens attached to FHA case numbers assigned on or after September 7th, the first day of the FHA short refinance program. This new program will continue to be available until the end of 2012.

So is the government’s short FHA refi program for you? If you are a home owner who is currently underwater but current on your mortgage payments, it may be a good idea to call the number on your mortgage bill to find out. Borrowers must be prepared for applications to take more than the normal amount of time for processing, underwriting and closing as there are many players in this transaction and all must agree to the final outcome. In the end, if all lenders, investors and lien holders get involved, the government’s new FHA refi program may reduce the amount of future foreclosures and strategic defaults that would only end up hurting the housing market even more.