New FHA Refinance Option

New Refinancing Terms Through the FHA

In March of 2010, the Obama administration announced a new program to allow the FHA to provide a refinancing option for millions of homeowners who owe more on their mortgage than their home is worth. The FHA refinancing strategy includes a mandatory write-down of the principal on first and second mortgages to create more affordable monthly payments for eligible homeowners.

Focusing on helping responsible borrowers, the government decided to limit eligibility for this FHA refinancing program to those homeowners who are current on their mortgage payments and who have seen the value of their home decline through no fault of their own. The main objective of the new FHA Refinance Option is to reduce their mortgage to a more manageable debt in line with the actual value of their home.

In addition to being current on their mortgage payments, eligible homeowners must also use the property as a primary residence, they must meet FHA’s basic guidelines for loan underwriting, and they must have a FICO score of at least 500.

The option to refinance through the FHA is also available to those with non-FHA mortgages, with the lender’s cooperation.

Borrowers with second mortgages may refinance with the FHA, but subordinate lenders must agree to discount the debt in whatever amount will bring the total mortgage debt down to no more than 115 percent of the home’s current market value after refinancing.

Not all homeowners in this situation will be able to refinance their home through this program, however. Participation by lenders is voluntary, and the likelihood of subordinate lenders agreeing to significant discounts is unknown.

The new program’s funding, provided entirely from existing TARP funds, will focus on financial incentives for both primary and secondary lenders to cooperate with the loan write-downs and absorb the related loss. Funding has also been made available to cover part of those losses. The Treasury Department has set a cap of $14 billion on allocation of these incentives.

There will be no attempt made to reduce the impact of forgiven debt on the homeowner’s credit report. However, the lender’s Credit Watch score will remain unaffected by the loan’s performance, as long as they comply with the program requirements.

In a recent press release, the U.S. Department of the Treasury expressed hope that this program, along with all the others put forth in the past several months, will help to stabilize the market even further. Their experts are already seeing some improvement in the housing market, especially with the four million homeowners who have already refinanced their existing mortgages under the Making Home Affordable Program and who are now collectively saving over $7 million per year on their mortgage payments.