In our last blog post, we discussed when a borrower is permitted to refinance a home loan using an FHA mortgage. But there’s one area not covered by the rules on refinancing with cash out or with no-cash out FHA refinancing.
What about borrowers who are underwater on non-FHA mortgages, sitting in what in what is known by mortgage professionals as a “negative equity position”? Is there any help for these home owners?
According to HUD 4000.1, the FHA loan handbook, there is a program called the FHA Short Refi, which “allows the Mortgagee to refinance a non FHA-insured Mortgage in which the Borrower is in a negative equity position”. That could be good news for some who badly need to get back on the road to building equity once more.
Unfortunately, this program had an expiration date. Mortgage loans with case numbers issued on or after December 31, 2016 are not, at the time of this writing, eligible for an FHA Short Refi. Those who do qualify are required to enter a three month trial payment plan that must be passed as a condition of getting approved a full refinance loan.
Under the FHA Short Refinance loan program, the following requirements apply for those who qualify:
“The refinanced FHA-insured first Mortgage must have a Loan-to-Value (LTV) ratio of no more than 97.75 percent and any new or re-subordinated Mortgages must not result in a Combined Loan-to-Value (CLTV) ratio greater than 115 percent.” Additionally,
Borrowers who were looking at FHA Short Refi as an option to avoid losing their home or who may be struggling to keep up with their mortgage payments should consider the list of alternatives found on the FHA official site which include the following as described on HUD.gov:
- Home Affordable Refinance Program (HARP): If you are current on your mortgage and have been unable to obtain a traditional refinance because the value of your home has declined, you may be eligible to refinance through HARP. HARP is designed to help you refinance into a new affordable, more stable mortgage.
- Principal Reduction Alternative: PRA was designed to help homeowners whose homes are worth significantly less than they owe by encouraging servicers and investors to reduce the amount you owe on your home.
- Treasury/FHA Second Lien Program (FHA2LP): If you have a second mortgage and the mortgage servicer of your first mortgage agrees to participate in FHA Short Refinance, you may qualify to have your second mortgage on the same home reduced or eliminated through FHA2LP. If the servicer of your second mortgage agrees to participate, the total amount of your mortgage debt after the refinance cannot exceed 115% of your home’s current value.
Borrowers who need to refinance an existing FHA mortgage should consider the FHA-to-FHA refinance loan option known as FHA Streamline Refinance, which usually requires the new loan to feature lower payments, lower interest rates, or a fixed rate loan to replace an adjustable rate mortgage.