The FHA Short Refinance was devised as a mortgage lifeline to over half a million borrowers left underwater by the 2008 housing crisis. The aim of this program was to keep these underwater homeowners afloat by allowing them to refinance into more affordable, reduced principle FHA mortgages with lower interest rates.
FHA Short Refinance Shortfalls
Like several other special programs offered during this period, volume and demand has not met original projections. In fact, only about 5,000 of these FHA Short-Refi loans have been originated since it’s inception in 2010, far short of the half-million to 1.5 million originally estimated. This shortfall is the result of several factors, the largest being a lack of lender interest in offering it to borrowers.
And because any sort of “short” financial product involves the current lien-holder accepting a substantial “write-down” or loss, FHA Short-Refi applicants faced great difficulties convincing their current lender to accept less money to pay off their old mortgage for a new FHA loan. The FHA Short Refinance program was scheduled to end in 2012 but has now been extended through 2016.
FHA Short Refinance Requirements
If the underwater mortgage is on a borrower’s primary residence, and they haven’t been late on their last three payments, and they can qualify for an FHA-backed mortgage with a credit score of at least 500, the FHA Short Refinance program could significantly reduce the principal balance of their mortgage. To qualify, their lender must agree to participate and they must have total monthly debts less than 50% of their monthly income.
Once these conditions are met, the lender must reduce the balance of the mortgage by at least 10% so that they end up with a loan-to-value (LTV) that’s no more than 97.75% of the current home value. If they have a second mortgage attached, the combined loan amounts may not exceed 115% of present value, and their primary lender may have the option of paying off the second mortgage. Here is a recap of requirements.
Borrower’s must meet each of the following:
- Standard FHA loan requirements must be met.
- Current mortgage balance must be more than property value.
- Payments must be current and on-time.
- Mortgage must be for primary residence.
- FICO credit score must be greater than 500.
- No felony convictions in last ten years for larceny, theft, fraud, forgery or money laundering.
Additionally, the borrowers current mortgage must comply with the following:
- Current mortgage can not be an FHA loan.
- Current lender must agree to write off at least 10% percent of the principal balance.
- Any second mortgage must be re-subordinated.
- New mortgage loan-t0-value (LTV) ratio can not exceed 97.75% of current property value (115% CLTV if second mortgage exists, unless it is held by a government entity).
The conditions might seem complicated, but if the value of your home is less than the balance of your mortgage(s), the FHA Short Refinance could be an overlooked option. If you’re having trouble with other refinance programs, it could be worth the time to ask your lender if an FHA Short Refinance is a solution that works, both for you and for your lender.