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Friday November 15th 2019

FHA Short Refinance: Help in Hard Times Without Destroying Your Credit

Many families continue paying monthly mortgages by tightening monthly budgets, scrimping and saving. As the housing market declined, homeowners became strapped with properties worth less than the original mortgage amount.

Property Value Declines

Overall statistics indicate 23% of owners experienced property value decreases. In certain locations, the numbers climb to 68%. Selling the property would not eliminate the mortgage and lenders were reluctant to refinance. Up until now, there was little hope for these struggling people.

The government recently developed a finance program that helps stabilize the housing market by decreasing the difference between a property’s actual value and cost. Some programs provided lowered interest rates or extended loan payments in an attempt to lower monthly payments.

However, the newly introduced FHA program chips away at the loan principle to more accurately reflect current property values. Individuals must meet specific criteria before using an FHA short refinance to get help.

FHA Stipulations

  • Homeowners must owe more on the property than it is currently worth. In other words, the original loan amount must exceed the current property value. This does not include fees or interest.
  • The loan applies only to those who did not acquire FHA backed financing when obtaining the property.
  • Individuals must be current on monthly mortgage payments.
  • A personal credit score, or FICO score, must be equal to or greater than 500.
  • The home must be a primary residence with an original loan. There are other requirements for persons attempting to refinance a second mortgage or a rental property.
  • Owners must obtain present mortgage lender approval. Financiers owning mortgages voluntarily participate in the FHA program and agree to forgive up to 10% of the principle debt.
  • FHA refinance loans are available now through the end of 2012.

Homeowners and financiers searching for specific information find details at the following HUD website:

Benefits to Lenders

While financiers generally look out for the best interest and profitability of the institution, many allowed risky mortgage loans. Reducing a percentage of loan principle is a more lucrative alternative to owners defaulting on loans. The program also assists lenders in recouping the losses on these investments. The FHA provides lenders with cash incentives while participating in the program.

Each relinquished loan provides $500 in cash, in addition to a percentage of the difference between the initial loan amount and the decreased principle. Homeowners are not restricted to obtain refinancing through the same institution; however, the refinanced amount cannot exceed the minimum loan to value ratio of 97.5%.

Caution to Homeowners

Closing costs, fees and possibly mortgage insurance accompany FHA backed refinance loans. The amount of excused principle triggers negative marks on personal credit reports. If not refinancing through a current lender, beware of many refinancing scams.

Some fail to disclose the amounts of closing costs, interest rates and loan terms, although the law requires institutions to do so. Also, obtain the time frame required to close the deal before interest rates are eligible for reevaluation. Use extreme caution when lenders request signatures on documents containing false information or no information at all.

FHA Versus Conventional Loans

There are many differences between getting an FHA (Federal Housing Administration) loan and choosing to get a conventional loan, and yet at the same time, there are many similarities as well. In the total scheme of things, it is far easier for a potential homeowner to qualify for an FHA loan than it is for them to get rewarded with a conventional loan. An individual’s qualifying standards are put into play when deciding between the two loans. In a nutshell, a 3 to 5% down payment [of the homes asking price] is necessary for an FHA loan — versus — a 5 to 25% down payment when getting a conventional loan. Which one is going to be right for you, is what we would like to outline in assisting you in making the proper decision.