FHA Refinancing for Underwater Borrowers

Posted by  on Sep 28, 2010

If you owe more on your mortgage than your home is worth, HAMP has a new program for you. This program is different from any other Making Home Affordable plan launched by the US government to help homeowners.

Let's count the ways that this new program--an FHA refinance for underwater borrowers--is different from other government assistance programs:

1. You don't have to prove a hardship. This is the big one. According to the plan's creators, the fact that you're underwater is a hardship.

2. An appraisal is required. You would replace your old underwater loan with a new FHA mortgage, which can't exceed 97.75% of the value of your home. So an appraisal is part of the deal.

3. You get a principal reduction of at least 10%. A minimum 10% principal reduction is required--and more, if that's what it takes to get your new loan amount down below 97.75% of your property's value. In addition, if you have a second mortgage, your total loans against the property can't exceed 115% of its value. So the mortgage lender with the second lien may also have to agree to reduce your loan balance. The mortgage lenders are compensated by TARP funds--the government covers half of whatever reductions your lender grants you.

4. HAMP carries no trial modification period and no modified interest rate. You just replace the old loan with a new, smaller FHA mortgage at today's mortgage rates. You don't get a 2% government-subsidized interest rate.

5. Your current mortgage can't be an FHA loan. FHA borrowers have many loss mitigation options available to them, including FHA HAMP. However, federal law prohibits FHA from explicitly lowering your principal balance.

6. You must be current on your mortgage. Unlike the other HAMP programs, which require you be at risk of imminent default, you cannot be delinquent on your mortgage to qualify for this program.

7. You must qualify for a new FHA mortgage by meeting FHA underwriting and eligibility requirements. If a student loan default or tax lien leaves you ineligible for government loans (you'll turn up in a database called CAIVRS if you are), you can't take advantage of this program.

8. The program is voluntary. Your lender will notify you if it decides to participate in the program and write down your loan.

That last point is probably the big flaw in the program. If you're at risk for default, a lender has reason to want your potentially toxic loan off its books. But if you are paying your mortgage on time, why would any mortgage lender want to lose money and let you off the hook? And only those who are faithfully paying their underwater mortgages are eligible. It would be very surprising if this program helps even a tenth of the 3 to 4 million homeowners FHA says it will.


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