FHA ‘Short Refi’ Summary

FHA originator types are chattering about the FHA Short Refinance Option – an additional refinancing option for “responsible homeowners” who owe more on their mortgage than the value of their property. Candidates are borrowers who are underwater but current on their existing mortgage, AND whose lien holders voluntarily agree to write off at least 10 percent of the unpaid principal balance of the first mortgage. (Sometimes that is a tall order, given the way FHA loans are pooled, sliced and diced, and sold – it is usually not like ABC Bank owns the Hernandez loan.) Besides having negative equity and be current, there are other requirements such as the property being owner occupied, 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; and the existing loan to be refinanced must not be a FHA-insured loan. On the investor side, the existing first lien holder must write off at least 10 percent of the unpaid principal In addition, the refinanced FHA-insured first mortgage must have a LTV of no more than 97.75% and a CLTV no greater than 115%. To facilitate refinancing, the Treasury Department will provide incentives to existing second-lien holders who agree to full or partial extinguishment of the liens.