Underwater no more with an FHA short refinance

November 07th, 2011

You owe $375,000 on your home. The adjustable mortgage has one year to go before the teaser rate expires and the loan becomes adjustable.Your employer has cut your hours and your next door neighbor's home just sold for only $325,000.

You can't sell, can't refinance, and it's a struggle to make the monthly payments. What are your options?

Underwater…and holding your breath?

This is a scenario playing out all across America. Too often the two options most frequently taken by homeowners are either walking away from their homes or attempting to pull off a short sale, which could leave them owing the lender--in this case the $50,000 difference between the $375,000 balance and the $325,000 sale price.

There is a third option that could help them reduce their mortgage payments, eliminate the negative home equity, and let them keep the property--an FHA Short Refinance. If a borrower qualifies, an FHA short-refinance can replace their underwater mortgage with an FHA loan and a lower balance.

FHA Short-Refi

FHA short-refi criteria include:

  • The home must be your primary residence.
  • The current mortgage (the one being refinanced) must be current.
  • You must meet FHA underwriting guidelines for the refinance.
  • Your new principal balance cannot exceed 97.75% of the property value.
  • Your current lender must be willing to reduce the balance to no more 97.75% of the property value and write off at least 10% of the principal. This is voluntary.
  • You cannot have been convicted within the last 10 years of felony larceny, theft, fraud, forgery, money laundering or tax evasion in connection with a mortgage or real estate transaction.

What Now?

Use a free mortgage calculator to estimate your new potential mortgage payment. Calculate 97.75% of your estimated property value and input that to the loan payment calculator with the current refinance rate to find your estimated payment. Note that your actual home loan refinance payment will be slightly higher due to FHA mortgage insurance premiums.

If the estimated payment is reasonably close to one you know you can afford, then contact your lender to see if it is participating in the program. Again, lender participation is voluntary.

Posted By :

Dennis is co-owner and broker of record for Stratis Financial in Southern California. With over twenty years experience in the mortgage industry he has helped homeowners save millions of dollars refinancing their homes. His Weekly Rate and Market Update keeps his clients and real estate professionals educated and informed on the mortgage industry and the economy. Dennis has a degree in Economics and Political Studies from Pitzer College and is married with two children.

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