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FHA and HUD Have Resources Available to Help you Avoid Foreclosure.
If you are in danger of being foreclosed, first visit HUD's tips for avoiding foreclosure. The sooner you act, the more likely you are to save your home. HUD also approves housing counselors who can help you find other options. Visit the above link to locate a housing counselor in your state.
You can also contact the FHA at (800) CALL-FHA if you have an FHA loan and are at risk of being foreclosed. Lenders are required to meet FHA's loan servicing standards when they provide FHA loans. If they're not, please report them to the FHA's National Servicing Center at (888) 297-8685.
Help for Service Members
If you're a service member on active duty, you may also be eligible for a reduced interest rate under special FHA rules. You can apply to temporarily reduce your interest rate below 6% if you acquired the mortgage before enlisting, or before being called to active duty. Your lender is prohibited from foreclosing on your home while you're on active duty or within 90 days of ending your service.
Advice for Protecting Your Credit
The most important thing you can do to avoid losing your home and protect your credit is to act quickly. Both HUD and the FHA advise contacting your lender as soon as you become aware of the problem. Do not wait for a notice of default. Acting sooner gives you more time to find an equitable solution for everyone, whether that solution is entering into a loan modification program or selling your home.
If you cannot avoid foreclosure, your credit will be damaged, however working with your lender to mitigate some of the damage is better than simply mailing back your keys. Fannie Mae, which works with the FHA, announced that it will disqualify borrowers who walked away from their homes from receiving new Fannie Mae-backed loans for five years. They will also require a minimum credit score of 680. Finally, the IRS may also opt to issue a 1099-A or 1099-C to those who walk away on the unpaid balance.
FHA Short Refinance
The Federal Housing Administration (FHA) initiated a government loan program to assist homeowners who have seen their property values drop. The program, called the FHA Short Refinance, 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 new 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.
The FHA Short Refinance program has a lot of restrictions. To qualify for the program a borrower must:
- Be up-to-date on the payments for the current mortgage
- Be in a negative equity position
- Live in the property as the primary residence
- Have a current loan that is NOT an FHA guaranteed loan
- Meet FHA qualifying rules for debt-to-income ratio
- Have a credit score greater than 500
- Receive at least a 10% reduction in the principal balance from the current lender
- Not exceed a loan-to-value of 97.75% on the new FHA loan
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 FHA Short Refinance option is aimed at homeowners that are current on their mortgage payments and who suffered substantial depreciation in the value of their homes. Borrowers must secure a principal reduction from their lenders of at least 10%. If your home is underwater and you would benefit from lowering your current interest rate, it is worthwhile to consider this program. Separately, even if you have a good interest, if you can get your lender to agree to reduce your principal balance, the program may benefit you strongly.