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Refinancing to an FHA Mortgage From a Conventional Loan for Underwater Borrowers

In a troubled housing market, many borrowers discover the property they’ve invested in has lost value, and the borrower may owe more on the home than they can reasonably expect to sell the property for.

What does a borrower do in a situation where a potential loss on the home could occur through no fault of their own? For a limited time the FHA offers help to those in “negative equity positions” with an FHA refinancing loan option that moves the borrower from a conventional mortgage to an FHA-insured loan.

The program was created specifically for homeowners with conventional loans owing more than the current value of the property. These “underwater” borrowers must meet specific FHA requirements, and lender participation in the program is voluntary, but qualified underwater home owners should consider this FHA refinancing loan program if they are concerned about remaining in a negative equity position on the conventional loan.

There are several requirements for this type of loan of both borrower and lender. FHA regulations state this temporary program requires “consent of the mortgage lien holders to write off the unpaid principal balance of the first lien by at least 10 percent.”

In order for a borrower to qualify for this type of refinancing, the loan must be a conventional mortgage, the borrower must not be delinquent and have a FICO-based credit score equal to 500 or better.

The delinquency issue raises some questions for borrowers who have had late payments in the past–according to FHA guidelines, the rules state the loan must be “current for the month due”. Past issues already dealt with may not be a deciding factor–ask your loan officer for additional details.

Another issue for this type of FHA refinancing is occupancy. Conventional borrowers may not have the same occupancy requirements as typical FHA mortgage loans, but for an FHA refinance of this type, the borrower must be using the property as his or her primary residence in order to be approved for the loan. Investment properties are not eligible.

The borrower is required to qualify for the new loan using typical FHA loan standards. Rules for this program state “…the loan to value of the new FHA first mortgage cannot exceed 97.75%”. Additionally, the FHA requires second mortgages to be re-subordinated and “the combined loan to value cannot exceed 115%”. For this type of FHA refinancing, lenders may not use “premium pricing” for the purpose of paying off “existing debt obligations” or “make mortgage payments on behalf of the borrowers”.

The FHA official site states this program is “effective for FHA loans with case numbers assigned on or after September 7, 2010 that are closed on or before December 31, 2012.”

Joe Wallace - Staff Writer

By Joe Wallace

May 6, 2011

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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