The FHA Short Refinance Program

Beginning on September 7, 2010, homeowners who are current but underwater on their mortgage may have a new opportunity to refinance under the Making Home Affordable Program. For those who don’t have a FHA mortgage but would like more favorable mortgage terms, the U.S. Department of Housing and Urban Development (HUD) is offering a short refinance option.

A short refinance refers to the fact that the lender is combining a 10 percent principal write-off with a refinance from a non-FHA loan to a FHA loan. The borrower is refinancing a smaller (shorter) amount, they are receiving a more affordable loan, and the non-FHA lender is reducing their risk of another borrower defaulting on their mortgage.

The short refinance program is basically a new option under the FHA Refinance Program of March 2010, in which the terms are now available to non-FHA borrowers. These homeowners must meet the same general criteria to be considered for a short refinance. Borrowers must be current on their existing mortgage, but the balance due must be greater than the present fair market value (FMV). Borrowers must also have FICO scores over 500 and use the property as their primary home.

After September 19, 2010, when the new Dodd-Frank Wall Street Reform and Consumer Protection Act goes into effect, applicants will also be subject to Section 1481(d) of the Act, which applies to mortgages. Borrowers will be automatically disqualified from the short refinance program (and all other Making Home Affordable programs) if they have been convicted of one of the following offenses within the last 10 years: theft, fraud, forgery, felony larceny, money laundering, or tax evasion.

No other debt may be rolled into the new FHA loan and paid off simply to increase a credit score, lower a debt-to-income ratio, or otherwise appear more qualified on the loan application.

If the borrower has already had the existing loan permanently modified, he or she may still qualify if the modification was made under HAMP and it was completed more than a month ago. If the prior loan modification was under a non-HAMP agreement, that modification had to be completed more than three months ago and at least three of those monthly payments had to have been made on time. In either case, if the modification is still in a temporary or trial period, the borrower is not eligible for the short refinance program.

Lenders also have certain requirements if they choose to participate in the short refinance program. The original non-FHA lender’s principal write-off must be a minimum of 10 percent. In addition, the write-off must be a permanent loan modification, and must be the only adjustment to the loan balance in preparation for the refinancing. Finally, the original lender must agree to report the non-FHA loan as paid in full. In exchange for their cooperation, financial incentives will be offered to each participating lender who completes a refinance under this program.

Second mortgages must stay subordinated to the new loan even though the new loan was written last. Incentives will also be offered to subordinate lien holders who agree to write off part or all of their outstanding balance and waive their right to collect the forgiven debt.

Applications for the short refinance program will be accepted until December 31, 2012. Borrowers who need more information can read the original mortgagee letter issued by HUD. To apply, they should first contact their current mortgage lender and ask if that lender is participating in the Making Home Affordable Program.