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Underwater Mortgage Refinance Options

Home values have fallen dramatically, leaving many homeowners seeking a way to refinance an underwater home and take advantage of today\'s low interset rates.
HIGHLIGHTS
  • Understand that you are not alone, if your home value has dropped significantly.
  • Review the FHA Short Refinance program requirements.
  • Check out the Refi Plus program, if your loan belongs to Freddie Mac or Fannie Mae

Can I Refinance, if I Owe More than My Home is Worth?

Home prices have fallen dramatically, in many parts of the United States. Homeowners who once had strong equity positions now find themselves with a house that is worth less than what they owe on it.

Some borrowers who are 'underwater' on their home can't afford to make their mortgage payment each month. These borrowers are facing foreclosure or end up trying to work out a short-sale or deed-in-lieu of foreclosure.

Other underwater borrowers are able to make their payment, but want to be able to take advantage of the historically low mortgage interest rates that are available. Because one of the key facts in qualifying for a refinance loan is LTV (loan-to-value: the size of the loan compared to the value of the house), borrowers who owe more than their home is worth have limited options.

Few Options Exist

Provided that a borrower meets other important qualifying requirements, such as a strong credit score, a healthy debt-to-income ratio, and a stable employment history, it may be possible to find a refinance loan, even when underwater.

What can be accomplished depends, in part, depends on your refinancing goals. Are you trying to lower your monthly payment, due to difficulties making your monthly payment? Do you want to take cash out of your home’s equity to pay for something?

Refi Plus

One program is called ‘Refi Plus.’ Refi Plus loans are available only for loans that are backed by Fannie Mae or Freddie Mac.  In theory, Refi Plus loans can be offered up to 125% of the value of your property, but it seems that most lenders will not lend beyond 105%. To see if your current loan is held by Fannie or Freddie, you can use this convenient tool, only entering your street address, unit, city, state, and ZIP code. You have to be the owner of the home, to use the tool, or have the owner's permission.

FHA Short Refinance Program

A second program designed for upside-down borrowers is the FHA Short Refinance program. The Federal Housing Administration (FHA) initiated this new government loan program to assist homeowners who have seen their property values drop. The program began on September 7th, 2010 and is slated to run through December 21st, 2012. The goal is to help borrowers in a negative equity position refinance into a more secure loan. 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 Refi is targeted to borrowers who are current and can afford their payments, borrowers who could not qualify for the different loan modification programs available.

FHA Short Refinance Requirements

The FHA Short Refinance program has a lot of restrictions. In order to qualify for the program a borrower must:

  1. Be up-to-date on the payments for the current mortgage
  2. Be in a negative equity position
  3. Live in the property as the primary residence
  4. Have a current loan that is NOT an FHA guaranteed loan
  5. Meet FHA qualifying rules for debt-to-income ratio
  6. Have a credit score of over 500
  7. Receive at least a 10% reduction in the principal balance from the current lender
  8. Not exceed a loan-to-value of 97.75% on the new FHA loan

Requirements for Properties with Second Mortgages

Properties with second loans or home equity lines of credit (HELOC) have additional restrictions:

  1. Any second loan must agree to be subordinated
  2. If the borrower has a second mortgage the combined loan-to-value can reach 115%.
  3. The second loan cannot call for a balloon repayment, for a minimum of 10 years, unless the property is sold or refinanced.

Previous loan modification is not a barrier

Even borrowers who have gone through a loan modification may qualify for the new FHA Short Refinance program. If a borrower went through the Making Homes Affordable Program, he may be eligible for the new FHA program in the month after the loan modification was made permanent. A three month on-time payment history is required for eligibility for any borrower who had a loan modification outside of the Making Homes Affordable Program. In fact, the new FHA Short Refi may be an ideal way for someone who has completed a loan modification to further improve his or her financial position.

FHA Short Refinance Negatives

Potential negative effects of the program include an FHA requirement to purchase mortgage insurance, closing costs for the new loan, and the chance that a lender can report a reduction in the principal balance to the credit bureaus, harming the borrower's credit score.

The biggest negative of the FHA Short Refi program has been that few lenders have chosen to participate, making it a frustrating experience for many people who want to refinance when underwater.

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