FHA Short Refinance Program Requirements

October 5, 2010

On Tuesday September 7, 2010, the FHA started a program designed to help homeowners who are underwater on their mortgages-those who owe more on the home than the home is worth. Known as the FHA short refinance option, it's a refinancing plan for borrowers who do not have FHA loans and are current on their mortgage payments. FHA requirements to participate in the program include credit score minimums and having a lender willing to write off at least 10% of the original home loan.

According to the Department of Housing and Urban Development, the short refinance program is 100% voluntary--lenders or lien holders are not compelled to participate.

As previously mentioned, the borrower must owe more than the home is worth, and FHA insured loans are NOT eligible. Borrowers must apply for the refinancing loan under standard FHA requirements including a credit check.

Credit requirements for the FHA short refinancing program include a FICO score of 500 or greater. Major negative credit data discovered during the application process must have an explanation from the borrower in writing.

As with other FHA loans, the applicant is required to live in the property being refinanced as the primary residence. If the building is a multi-family unit, the borrower must occupy one of those units.

According to HUD rules, the refinanced property must have a loan-to-value ratio of no more than 97.75%. There are also FHA requirements on what HUD calls "Non-extinguished existing subordinate mortgages". These must be re-subordinated, and HUD rules state, ".The new loan may not have a combined loan-to-value ratio greater than 115 percent."

Other guidelines from HUD include a stipulation that "FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance."

The FHA short refinancing option is designed for people who owe at least 15% more on the property than their home is actually worth, and while the program requires borrowers to be current on their mortgages before applying, those who have used loan modification programs in the past are eligible for the FHA short refinancing option under the following circumstances:

If the modification was made under the Making Home Affordable Program, the FHA short refinancing loan may close the month following the date the modification was permanent.

For non Home Affordable loan modifications, the borrower must have a record of
three on-time monthly payments. The modified mortgage must be current for the
month due.

The FHA short refinancing program is not permanent--it is currently scheduled to run until the end of 2012. Non-FHA loans with case numbers issued between September 7th, 2010 and closed on or before the end of 2012 are eligible for consideration.