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New program for 'underwater' homeowners

The government has launched a program that actually reduces mortgage principal.

By Stacy Johnson Sep 22, 2010 3:48PM

This post comes from Stacy Johnson at partner site Money Talks News.


We've all watched as program after program rolls out of Washington, D.C., for those hapless homeowners who can't make their mortgage payments. And we've all seen or heard stories about people who simply stop paying their mortgage and walk away from their obligations.

Where's the help for the many homeowners who continue making payments on a mortgage that exceeds their home's value? It's finally here -- if you qualify.


According to a government news release, the Federal Housing Administration's "short refinance" option is targeted to help people who owe more on their mortgage than their home is worth -- or are "underwater" -- because their local markets saw large declines in home values. The program allows homeowners with negative equity to refinance into a new FHA mortgage -- one that would be less than the current value of their home.


Watch the following news story, then meet me on the other side for more.

Unlike previous programs that modify loans by doing things like lowering interest rates and extending mortgages, this one is designed to reduce mortgage balances. In short, qualifying underwater homeowners could once again resurface.

"We're throwing a lifeline out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined," said FHA Commissioner David H. Stevens. "This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product."

According to research firm CoreLogic, as of June 30, about 23% of mortgage borrowers nationwide owe more on their homes than they're worth. And in some parts of the country, it's much worse: In Nevada, 68% are underwater; in Arizona, 50%; in Florida, 46%; and in Michigan, 38%.


The main problem with this program -- one that will prevent many homeowners from making it work -- is that bank participation is entirely voluntary. Here are the basics:


Who qualifies? You might qualify if:
  • You have negative equity.
  • You're current on the mortgage to be refinanced.
  • You occupy the home as your primary residence -- although if it's also a rental property, it could be up to four units.
  • You can qualify for the new loan under standard FHA underwriting requirements and have a FICO credit score of at least 500.
  • The existing loan to be refinanced isn't an FHA-insured loan.

Even if you meet all those criteria, both the bank or investor that owns the mortgage and the company that services it will have to agree to reduce the loan until it's no more than 97.75% of the home's value. They also have to reduce it by at least 10%.


What you should do. If you think you're eligible, first read a complete description of the qualifying criteria in this document (.pdf file), which explains the program in more detail. Then contact the company you make your mortgage payments to monthly and ask about the short refinance program. If they're participating and say you're potentially eligible, they should be able to guide you to the proper paperwork. If they haven't heard of the program, refer them to this document (.pdf file), issued by the government to explain the program to lenders.

How much you'll pay. Refinancing through this program will entail the same closing and other costs you'd pay to take out any FHA mortgage. Keep in mind that FHA mortgages require paying mortgage insurance.


Beware your credit. Anytime a lender forgives a loan or part of a loan, that could show up as a negative on your credit history.

If you have a second mortgage. You can still qualify for the program with a first and second mortgage. The lender on the second mortgage must also agree to the refinance and, when it's complete, the combined mortgage debt can't be greater than 115% of the property's current value. The government will make some incentive payments for second-mortgage lenders that might encourage them to reduce the principal.


What about Fannie Mae and Freddie Mac loans? You heard me say in the video above that loans owned by Fannie Mae or Freddie Mac wouldn't qualify for this program. That's because these two quasi-governmental agencies have thus far had policies in place that precluded them for forgiving the principal. However, it now seems they're at least considering it. Check out this recent article from The Wall Street Journal.


Bottom line? It's good to know the government is finally tossing a line to people who have continued to pay their mortgages in trying times, even while underwater. The fact that it's voluntary for lenders may keep some otherwise deserving homeowners from being brought back to the surface. But with every rescue, the water gets a little nicer for all of us.


More from Money Talks News and MSN Money:

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