A FHA option for Non-FHA Borrowers

In August of 2010, the U.S. Department of Housing and Urban Development (HUD) announced the FHA short refinance option for homeowners with negative equity who wish to refinance their homes. The program is based on the FHA Refinance program initiated in March of 2010, and is now being extended to non-FHA borrowers.

The new option, otherwise known as the FHA short refinance, is the latest in a series of programs offered to help responsible homeowners who are current on their mortgage payments, but who are also unable to qualify for traditional refinancing because their house is now worth less than they owe on the mortgage. The recent housing crisis has left millions of families in a dismal economic situation due to various unstable mortgage products combined with falling home values.

The short refinance program, which begins on September 7, 2010, offers non-FHA borrowers the chance to obtain a new, more stable FHA mortgage under the terms of the same write-off program that is now available to current FHA borrowers. Each non-FHA lender is required to write off at least 10 percent of the original loan’s principal to refinance a smaller (shorter) amount and bring the new FHA mortgage’s loan-to-value ratio (LTV) down to at least 97.75 percent.

As with the FHA-to-FHA refinance program, borrowers must meet certain criteria before their application will be considered. They must be current on their existing non-FHA mortgage, they must have a credit score of over 500, they must be refinancing their primary home, and they must meet other FHA requirements for mortgage loan applicants.

One new certification from the borrower will be required to accompany all refinance program applications after September 19, 2010. When the new Dodd-Frank Wall Street Reform and Consumer Protection Act goes into effect, Section 1481(d) of the Act states that borrowers will be automatically disqualified from receiving mortgage assistance from the government if they have been convicted of felony larceny, theft, fraud, forgery, money laundering, or tax evasion within the last 10 years.

Lender’s participation in the refinance programs are optional, but there are certain financial incentives available to those lenders who agree to help their borrowers. However, these lenders must also agree to certain terms. The write-off of 10 percent or more is mandatory. The original lender of the non-FHA loan must agree to report the original loan as paid in full as agreed. If second lien holders are involved, they may also receive incentives to write off at least 10 percent of their loans in order to bring the combined LTV down to the required 115 percent.