FHA Short Refi Program

The FHA Short Refinance Program has always existed in an unofficial form but became a formal program on December 16, 2009 with Mortgagee Letter 09-52.  It was “refined” on August 6^th of 2010 with Mortgagee Letter 2010-23.  It was designed to provide more mortgage options to those that owe more than their house is worth.  There are many requirements for this loan but for most borrowers who are upside down on their home and have good credit; these criteria are likely to be met with the cooperation of the existing lenders about to be paid off.

For these transactions to work, the following criteria must be met:

• The homeowner must be upside down on the value of the home
• The homeowner must be current on the existing mortgage to be refinanced
• The homeowner must occupy the subject property (1-4 units) as their primary residence
• The homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a “FICO based” decision credit score greater than or equal to 500 (actually, 600 with us)
• The existing loan to be refinanced must not be a FHA-insured loan
• The existing first lien holder must write off at least 10 percent of the unpaid principal balance
• The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent of the appraised value
• Non-extinguished existing subordinate mortgages (2^nd mortgages and HELOC’s) must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent of the appraised value (the subordinate mortgages cannot have a balloon inside of 10 years, must permit prepayment, and must have monthly payments)
• For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, 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 (these are very rarely accepted and if this is the outcome of initial underwriting, other options should be considered)
• FHA lenders are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan
• FHA lenders are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance
• The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification
• If borrowers have gone through a modification where the payment wasn’t brought current by the existing lien holder they can be eligible for this program if (1) the modification was made under the terms of the Making Home Affordable Modification Program (HAMP), the loan may close the month following the date the modification was permanent or (2) the modification was a non-HAMP modification, the borrower must have made three monthly payments on time and the modified mortgage must be current for the month due

While it may seem unintuitive, this can actually be a good thing for your lender.  It requires their consent and when asked, they will evaluate the pros and cons.  They’ll consider if having a loan that’s hopelessly upside down on their books is a good thing, how much they could lose in a short sale, how much they could lose in a deed in lieu and how much they would lose in foreclosure.  Of these options, often the least expensive to the lender is the short refinance which is why these are considered more and more often these days.  Sometimes, they’ll ask that a HAMP modification be considered first and there’s nothing wrong with that.  It will likely result in a good outcome in the form of a modification or move the short refi option forward after a delay.

The loan process for putting these together is similar to other FHA transactions except it’s pre-underwritten on the hypothetical basis of a reduced payoff.  After the loan application, signed lending disclosures, income documentation, asset documentation and appraisal are in the loan file, it’s sent to the existing mortgage companies for their consideration.  Due to the lengthy process of coordinating with existing lenders, these loans can take up to 90 days whereas normal refinances take less than a month.

Short refi’s, HARP loans, HAMP modifications and buying after a short sale are all key products to tackling negative equity.  The FHA products are the least known and least explored but assuming good credit, should always be explored.

Charles Dailey - iLoan - NMLS ID# 79048 - CA DOC, MN DOC & WI DFI - 612.234.7283

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