FHA Short Refinance Program Helps Upside-Down Homeowners

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  • The FHA Short Refinance Program allows homeowners with negative equity to refinance.
  • The program slashes principal from mortgages on upside-down property.
  • Congress is threatening to remove funding for the program.

FHA Short Refinance Program Catching on With Lenders, Borrowers

Six months after the FHA announced its Short Refinance plan, it appears the program is developing traction among 23 lenders willing to follow its guidelines. The New York Times reported in mid March 2011 the following five lenders had restructured 44 loans:

  • Wall Street Mortgage Bankers, Lake Success, NY.
  • 1st Alliance Lending, East Hartford, CT
  • Nationstar Mortgage, Lewisville, TX
  • E Mortgage Management, Haddon Township, NJ
  • Glacier Bank, Kalispell, MT

The FHA has a complete list of FHA qualified lenders, although not all are participating the short refinance program. Notable non-participants in the FHA program are Bank of America, Citibank and JPMorgan Chase. The Times quoted a Bank of America spokesman, who said, "Without the participation of Fannie Mae and Freddie Mac, we don’t believe the program can help a significant number of our borrowers." Wells Fargo and Ally Financial (parent company of G.M.A.C. and Ditech), said they created test programs for the FHA option, and are studying the results.

The Times quoted a Citibank spokesperson who said the bank was “participating in a third-party pilot program along the same lines as the F.H.A. Short Refi program,” but did not provide details.

John Diiorio, the owner of 1st Alliance Lending, said big banks were taking part behind the scenes, by referring homeowners to third-party lenders that could restructure their mortgages. He said 1st Alliance had “several hundred FHA Short Refi” loans in the pipeline.

Because the FHA announced the program in September 2010, and because such loans take three to four months from start to finish, Diiorio said the number of refinanced loans should increase in coming months. He said that, on average, 1st Alliance had negotiated a principal reduction of $86,000 on a $256,000 loan, a 33.5% cut, to $170,000. He said lenders and investors had agreed to reduce principal for only half of the loans 1st Alliance Lending worked on. Diiorio said borrowers pay a slightly higher fixed rate, typically 6% or so, but the financial impact was the same as a 5% rate on a higher-balance loan.

HUD estimated that 500,000 to 1.5 million borrowers could be eligible for the program. Even so, it faces challenges in Congress. In early March 2011 the House of Representatives voted to end it.

Bills.com’s Take on the FHA Short Refinance Program

Under the FHA Short Refinance program, a lender reduces the principal balance on the mortgage. The reduced-balance loan then passes from the private hands of the lender or investor that owns the loan to a loan that is guaranteed by the federal government. Previous government programs attempted to aid those who are behind on their mortgage payments. The FHA Short Refinance Program is targeted to borrowers who are current and can afford their payments, borrowers who could not qualify for the different loan modification programs available.

If you are upside-down or underwater on your mortgage and want to refinance, the FHA Short Refinance Program is a great way to knock-down your principal and pay less in your monthly mortgage payments. Congress is considering cutting the program, so if Fannie Mae or Freddie Mac are not your mortgage investor, call your mortgage servicer to learn if it is participating in the FHA Short Refinance Program. Or, contact one of the lenders mentioned at the top of this article.

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Comments (75)

Izzy C.
Merced, CA  |  December 30, 2013
Seterus holds my loan and they are not a mortgage company only a debt collector. Not sure how that works but that is what I was told once B of A sold my loan. I have never been late with my payments and want a short refi but I don't know who to contact since Seterus won't help, any ideas?
December 31, 2013
Unfortunately, if your lender is not willing to participate and reduce your principal balance, then you can't use the FHA Short Refi program.
Kenny W.
Fort Myers, FL  |  July 26, 2013
My first mortgage is with First Horizon (now Tennessee). I contacted them, as was given to Quicken Loans as they do all tehir refinances. The nice gentleman, D. Tritter, told me that he couldn't help. He basically said that this program was a game. He did not do these FHA Short Refinances, and he didn't know of any lender who did it. He said it was "voluntary" at the lender and, ha ha, I was most likely out of luck. He didn't know the number of First Horizon's loan mitigation department or the number of the person there who does FHA short refis. I read him an article that said First Horizon did the most of these, as well as the Nationastar mortgage guidelines issued 12/20/12 which shows First HOrizon had internal control set up. So, now I am going to write to First Horizon. If First Horizon has done some of the loans, then under HUD Fair Housing . . . wouldn't everyone similarly situated have to be fairly treated the same accord? The system screws the honest people who paid their mortgage and lost their 20% downpayment. I just read that Florida is sending out millions of dollars of settlement money to foreclosed homeowners. I am in a 100% conventional fixed rate mortgage that isn't Freddie, Fannie, nor FHA backed. I'm screwed, unless I walk away. And, Florida's governer just made that a real possibility.
July 26, 2013
The Short Refi program has helped very few people. Unfortunately, a lender can treat people who are similarly situated differently, as long as they don't discriminate on the basis of race, religion, national origin, or some other protected class.
Vanessa S.
Rockville, MD  |  June 28, 2013
My mortgage unfortunately is with Chase and 2nd Mortgage with Wells Fargo. Neither want to participate because they could care less if you are current on your mortgage they want to continue to take your money. My frustration has been they feel you can pay so keep paying - even though they are got bail outs and are helping others who don't pay their mortgage. A Wells Fargo Agent went as far as to tell me to "sign my home over to Wells Fargo" when I complained about their not participating in FHA Short Refinance. We need to find out who is NOT voting for this and vote them out of office. Sad the banks keep taking advantage of the people who pay! Wish I knew some options??
June 28, 2013
I understand your frustration. Perhaps rising property values will get you to the point where you can take advantage of a standard refinance.
Deidre A.
Locust Grove, VA  |  July 03, 2013
It seems it does not pay to be on time making your mortgage payments or if you have good credit. Why not help a group such as this and is under water? What is wrong with this picture.
Renee W.
Twp Of Ewing, NJ  |  May 30, 2013
I'm trying to do an FHA Refi. I spoke to the folks over at Making Homes Affordable and they said that I will qualify and suggested I do that. Problem is, you have to find someone to do it. I called 1st Alliance and they said that NJMFA (my lender) is not someone they regularly work with so I would have to have NJMFA contact them if they are willing to play. I called NFMFA and no one there seems to even know what an FHA Short refi is. Very frustrating. Know of any banks that are willing to do the leg work/negotiations for you?
May 31, 2013
I am not aware of any lenders that do what you want. Readers?
Jim K.
Town Of Nocatee, FL  |  May 15, 2013
We are in a non-GSE loan, no hardship, great income (thank God), and severely underwater. The only hopes for us are maybe HARP 3 or FHA short re-fi. Of course, B of A wants nothing to do with writing down the min. of 10%. Any other options?
May 21, 2013
Unfortunately, I am not aware of any options for you to refinance.
Sam K.
Twp Of Lakewood, NJ  |  May 13, 2013
1. I know a few people who have been offered a short refinance program from First Alliance, even though they are not current. I was told First Alliance is the only bank that can do it when the borrower is delinquent. Do you know anything about that? 2. What is the DTI required for a short refinance?
May 21, 2013
It is my understanding that borrowers need to be current on their mortgage to qualify. Regarding DTI, according to an FHA bulletin, "The homeowner’s total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income."
Chandler, AZ  |  April 11, 2013
I live in Arizona and have a conventional mortgage with BoA and a HLOC with Chase. Never late on payment and have good credit. Would I qualify for the FHA Short Refinance or PRA? If it turned out BoA does not participate in the FHA Short Refinance could I go else where?
April 14, 2013
You can speak to another lender about the FHA Short Refinance program, however, the first lien holder, BoA, would need to agree to a Principal Reduction of at least 10% of the unpaid principal balance. Check with BoA to see if you are eligible for that program. You might want to see if you are eligible for other refinance programs, such as the HARP 2 refinance loan.
Nancy R.
Grand Rapids, MI  |  September 27, 2012
Confused! I had a person from American Certified contact me and state that I was eligible for a P.R.A. reduction. Of course they asked for $ to help with the paperwork. My mortgage is through Wells Fargo and is a FHA mortgage, Wells Fargo states if I am FHA that I do not qualify for a P.R.A. reduction. Mike from American Certified says Wells Fargo is not being honest. Can you tell me if FHA is participating in the P.R.A. reduction program?
September 27, 2012
PRA is short for Principal Reduction Alternative, a HAMP-related plan promoted by the federal Dept. of Treasury and Dept. of Housing and Urban Development. According to the Making Home Affordable PRA Web page, more than 100 mortgage servicers participate in PRA, including Bank of America, CitiMortgage, JP Morgan Chase, and Wells Fargo.

I see no bar to FHA-insured loans in PRA or HAMP. To the contrary, the FHA publishes a Web page discussing HAMP eligibility.

Fannie Mae and Freddie Mac loans are not eligible for PRA.

My advice? Talk to Wells Fargo again and ask if you qualify for PRA. Please return here and share what you learn.
Gregg W.
Gilberts, IL  |  August 30, 2012
I closed on my Chase mortgage in May 2009, but my mortgage was not acquired by Fannie Mae until Aug 2009 (missed HARP deadline) I am at 100% LTV right now on 200k, and do not want to pay PMI (don't pay now - have been in house for 17 years.)What are my options? - Have not been late on mortgage. Credit rating of 760+ (current mortgage is 20 yr - want to go to 30 yr with no pre-payment penalty to help with current economic downturn. Both of us are employed)
August 31, 2012
I am not aware of any loan program that can meet your goals to refinance, given your LTV, desire to avoid PMI, and the fact that you do not meet the basic HARP requirements.
Lost Seattle S.
Seattle, WA  |  November 22, 2012
Same as above except refi'd last year (Washington St). Decided to lower payments more by downsizing to a smaller house (didn't lie about anything on loan app and used the FHA owner occupied 203k loan...great credit and income) to lower my payments as I was told by multiple realtors that I could easily sell my house for what I owe on it with fees factored. Now, I'm supposed to move into my new house within 30 days b/c 203k remodel is done and also live there at least one year, but my current house isn't selling even with 20 people looking at it in the past 6 months. I don't want to go upside down selling my current house as money is tight b/c my income at my longtime job took a hit. I think if there were no fees it would sell if that matters. I cannot sell the new house or I'm a "flipper" I'm reading everywhere. I wonder if that is an option as it would seem to solve everything as I KNOW I can sell it and actually make money even though I only bought it 4 months ago. My intention was always to live there, but now I can't sell my current house for what I owe, so not sure if that makes it okay just to list it at a fair but profitable price and sell it right away. I would go $50k below Zillow or more and still make money. If it would make sense to goa certain route then I'm fine with my 780 credit score getting hit. 1. Selling new house okay even though I used the 3.5% down 203k loan which requires the 1 year occupation...or intent maybe only needed? 2. Foreclose old house b/c have primary and car, so no credit need? Seems excessive kind of to me tho. 3. Short/DIL, but why would they say okay when I'M the one that the bought the new house and put myself in this mess and I have $40k in my 401k too. Job income changed hardship I can argue and have lowered my price over and over to get more buyers looking. 4. Any type of refi that keeps the MI off the payment so I can use the lower rates. The savings are the MI payment so doesn't seem to make sense. Any advice would be appreciated. I'm hoping I can just sell the new house, but if somehow getting out of my current house is an option that would be a huge weight off my back.
December 19, 2012
I suggest that you speak with your lender. The FHA recently extended the anti-flipper waiver rule. There are certain limitations on the type of transaction, including an arm's-length restriction. Check with the lender and see if you can sell the new house, even if you haven't lived there.
D S.
Orlando, FL  |  April 20, 2012
Just got off the phone with Wells Fargo. They told me they are NOT participating in the FHA Short Refinance Program. I told them very plainly that if they don't help me re-negotiate my loan I will be pursuing strategic foreclosure. They told me there was nothing they could do to help me. The property in question is a condo in Orlando bought in 2006 for $250,000, now valued at ~$100,000. Balance on mortgage is ~$200,000.
D R.
Oakland, CA  |  May 15, 2012
Hi, I called Wells moments ago as they are my lender. They are now participating. Please call again.
May 16, 2012
Did Wells Fargo indicate to you that they are willing to reduce your principal balance by at least 10%?
Rebecca M.
Tucson, AZ  |  June 21, 2012
I just got off the phone with them today and Wells says they are not participating. Why would they?
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