FHA Short Refinance for Underwater Mortgage Loans

If you’re a homeowner struggling with an underwater mortgage loan there is good news today regarding the FHA Short Refinance program. The Department of Housing and Urban Development (HUD) released a new program that will allow you to get a government insured mortgage loan, even if you’re underwater. Here are the basics of mortgage refinancing with this new program and some of the advantages and disadvantages inherent to government-backed home loans to help you get right-side-up in your underwater home loan.

This new program announced by the government today is called the FHA Short Refinance and to be eligible you must be up-to-date on your existing mortgage payments and of course be underwater, meaning you owe more than your home is worth. There is a catch however; your existing mortgage lender must agree to discount the balance you owe on your current home loan by a minimum of ten percent. Whether lenders will agree to discount home loans in this manner remains to be seen.

Help for Underwater Mortgage Loans

The Federal Housing Administration commissioner called the program a lifeline for families who are current on their payments but are suffering a hardship due to declining property values. The FHA short refinance loan is another tool the government is claiming will help homeowners in the United States combat negative equity by refinancing with safe, secure government backed home loans. The FHA short refinance program will begin assisting homeowners in refinancing their underwater mortgage loans September 7th, 2010.

FHA Short Refinance Requirements

In order to be eligible for refinancing your underwater mortgage loan with an FHA short refinance you must qualify for the program. This means your loan must be underwater, meaning you have negative equity, or owe more on your home loan than your property is worth. Additionally, you must be caught up on your mortgage payments. You must qualify for the program guidelines and occupy the home as your primary residence. That catch I was talking about earlier where your existing lender must agree to discount at least 10% of your current home loan balance means that according to program guidelines your new home loan must not have a higher balance than 97.75% of your home’s value (loan-to-value ratio) after the write-off.

Loan-to-value can be confusing for many homeowners; however, the gist of the FHA short refinance is that your lender must agree to take at least a 10% loss on your existing home loan. This loss shouldered by your mortgage lender essentially makes you right side up in your underwater mortgage loan. This program is going to be great for underwater homeowners that agree to take this loss…but what if yours won’t discount your existing mortgage balance by 10%?

FHA Mortgage Loan Disadvantages

There are some disadvantages to government backed home loans. The biggest disadvantage has a direct impact on your wallet. All loans backed by the Federal Housing Administration require that you carry Private Mortgage Insurance (PMI) on the loan. While this mortgage insurance does absolutely nothing to protect you as the homeowner, it does protect your mortgage lender from certain types of losses if you foreclose. Private Mortgage Insurance can cost you as much as $200 a month, even more in some cases, driving up your mortgage payments much higher than they would be without this insurance. Another disadvantage to government insured home loans is that many homeowners get a false sense of security when it comes to junk fees and unnecessary markup. The fact that your mortgage is an FHA short refinance does nothing to protect you from Yield Spread Premium or other junk fees. The rule of buyer beware when it comes to home loans always applies.