Refinancing Throws a Lifeline to Underwater Mortgages

The long-awaited rules that will allow homeowners with underwater mortgages to refinance using Federal Housing Authority (FHA) loans were finally announced by the FHA in a letter to mortgage servicers on Aug. 6. These loans will allow underwater borrowers to refinance to an affordable FHA loan.

Potentially 20 million homeowners may fall into underwater status by 2011, so the FHA could end up with a lot of underwater mortgages.

If your house is underwater and your interest rate is above 6 percent, you should definitely consider this refinance opportunity when it becomes available. Even if you have a good interest rate, the write-down of your first and/or second mortgage may make this deal worth considering.

You must be current on your mortgage to qualify for this FHA refinance opportunity. Also your lender or investor must be willing to write off at least 10 percent of the original first lien on the mortgage. The new program will be available starting September 7, 2010 and you will have until December 31, 2012 to finalize a refinance deal.

Your participation in this refinance program must be voluntary and you must have the consent of lien holders. In other words, if your lender refuses to participate, you won't be able to take advantage of this refinance program.

For your loan to qualify, you must meet these conditions:
--Your mortgage must be in a negative equity position;
--You must be current on the mortgage to be refinanced;
--You must occupy the subject property (1-4 units) as your primary residence;
--You must qualify for the new loan under standard FHA underwriting and your FICO score must be greater than or equal to 500;
--Your existing loan 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;
--If you have other subordinate mortgages (such as an equity line) they must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;
--Your 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; and
--You cannot use the new FHA mortgage to pay off existing debt obligations in order to qualify for the new loan.

If you're already undergone a loan modification, you may still qualify for these new FHA loans. Anyone whose loan was modified under the Making Home Affordable Modification Program (HAMP) may still be eligible beginning the month following the date the modification was permanent. If you were modified using a non-HAMP loan, you must make three on time monthly payments on the new modified mortgage and be current on the loan.

There are also requirements you must meet for any secondary financing such as a home equity loan or home equity line:
--You subordinate lien must not provide for a balloon payment before 10 years, unless the property is sold or refinanced;
--The terms must permit prepayment by the borrower, without penalty, after giving 30 days advance notice;
-Periodic payments, if any, must be collected monthly; and
--Any monthly payments must be included in the qualifying ratios unless payments have been deferred for no less than 36 months.

To encourage second lien holders to participate and extinguish fully or partially any second lien, the existing second lien servicer will be entitled to a one time incentive of $500 for each successful closing. There will also be an incentive for investors based on the combined loan to value of the existing lien and all senior liens associated with the mortgage.

Hopefully, these incentives will be enough to encourage your lender to participate.

Lita Epstein has written more than 25 books, including The 250 Questions You Should Ask to Avoid Foreclosure.