A little-known program offered through the Federal Housing Administration can be a lifesaver for qualified borrowers who are underwater on their home loans. It’s called the Short Refinance Program, and it’s the FHA’s way of offering a mortgage refinance loan that is manageable even for home owners with a poor loan-to-value ratio.
The program is only available to borrowers who are current on their payments, but who owe more on their mortgage than their house is worth. The home also must be the owner’s primary residence. The homeowner must qualify for the new loan, and have a FICO score of at least 500. It’s only intended for those who are NOT in a trial loan modification period and don’t already have an FHA loan (for those that do, there’s the FHA Streamline Refinance program).
How Short Refi Works
Thanks to the Short Refinance Program, unveiled in September 2010, homeowners don’t have to feel trapped in a privately held mortgage with a too-high interest rate and unfavorable loan terms. If approved, they can lower their payments significantly. Not everyone will qualify (consult your mortgage professional), but in many cases, the FHA refinancing process under this program will result in a new FHA mortgage with slightly positive, or even neutral, equity.
“We’re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined,” FHA Commissioner David H. Stevens stated at the time. “This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”
Major Banks Involved
At least five major banks have signed on to participate in the Short Refinance Program: Bank of America, Citigroup, JP Morgan Chase, Ally Financial/GMC, and Wells Fargo.
One condition is that the current lender has to agree to “write down” a percentage of the excess principal – but the government will help make up that cost, making it more appealing to the lender (and almost certainly a better bet than a foreclosure or short sale.)
The program is somewhat controversial politically, but as of this writing it is still an option for homeowners who want to stay in their homes and build equity under more affordable circumstances.