Posted by: cfigueira | March 27, 2010

FHA Short Refinance Option Coming Soon

A new option that should be available by fall of this year will allow borrowers current on their mortgages to execute short refinances into FHA loans, whether the original loan was FHA-insured or not.
The new FHA loan must have a balance no greater than 97.75 percent of the value of the home, and the total loan-to-value (including any second mortgages) cannot exceed 115 percent after the refinancing.
At the same time, the minimum write-down by the lender must be 10 percent of the unpaid balance of the original loan.
The total monthly payment, including any second mortgages, must not be greater than approximately 31 percent debt-to-income, though the borrower should benefit from both a reduced balance and a reduced interest rate thanks to the current low-rate environment.
Homeowner eligibility for the FHA short refinance program is as follows:
– Homeowners must be current on existing mortgage payment
– Homeowner must occupy the home as primary residence
– Homeowner must fully document income
– Homeowner must have Fico score of at least 500
– Existing lenders/investors must agree to principal write-down
Borrowers who execute an FHA short refinance should expect to see their credit score negatively impacted as with any other loan forgiveness.
And the standard FHA mortgage insurance premium structure will apply to the new FHA loans.
To increase lender participation, incentives for immediate write-downs of underwater second mortgages will be offered, based on the loan-to-value.
To fund the program, up to $14 billion in TARP funds will be used – FHA will publish data on the number of short refinance loans, the average percentage written down, and the quantity of principal reduced quarterly.

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