FHA Short Refinance Program FAQ

The FHA’s ‘Short Refinance’ Program: Frequently Asked Questions

By Nick Timiraos

On Saturday, we looked at the newest effort by the Obama administration to address the threat of foreclosures from borrowers who are underwater, or who owe more than their houses are worth.

If it works well, the program could deal with the risks of strategic default, from homeowners who could afford to make their payments but choose not to because they’re so far underwater. But the story noted how many of the knots that have snarled previous modification efforts—including dealing with second liens and contracts that govern mortgage securitizations—could also stymie the latest initiative.

Here are some answers to the most frequently asked questions:

Q: Who can participate?

Generally speaking, the program is designed for borrowers who are current on their loans and owe more than their properties are worth. Borrowers are refinancing into FHA-backed loans and must be able to meet all traditional underwriting guidelines (including a minimum credit score of 500 and an income that can support the current loan payments).

Loans already backed by the FHA can’t participate. Fannie and Freddie aren’t currently participating in the program, though it’s possible that they could decide to do so in the future. Fannie and Freddie currently have programs to allow borrowers to refinance loans for borrowers that are underwater, up to 125% of the property’s value.

Q: How does the program work?

If a borrower owes more than the property is currently worth, the bank or investor that owns the loan—and the company that services the loan (i.e., the company that collects monthly mortgage payments)—must agree to reduce the loan balance by at least 10% so that the new loan is no more than 97.75% of the home’s current value.

If they’re willing to take the loss, the borrower must agree to refinance into an FHA-backed loan at today’s interest rate.

Q: What costs could borrowers face?

Borrowers will have to pay transaction fees associated with refinancing. Because they’re getting an FHA-backed loan, they’ll also be paying mortgage insurance.

Q: Will participating in this program affect my credit score?

Yes. Lenders are forgiving some principal, which will be reported to credit bureaus.

Q: Can I use this program on an investment property or second home?

No. Borrowers must occupy the property. The FHA doesn’t finance second homes or investment properties.

Q: What if I have a second mortgage?

The combined mortgage debt on the first and second mortgages must be no greater than 115% of the property’s current value. The second-lien holder must agree to the refinance, and if the combined loan to value exceeds 115%, either the first- or second-lien holder (or both) will need to reduce the loan balance further. The government will make some incentive payments for second-lien holders that reduce principal.

Q: If my loan was modified by my bank, under HAMP or under a different program, can I participate in this program?

Maybe. If the modification was made under the Home Affordable Modification Program, or HAMP, the borrower is eligible one month after the HAMP modification is made permanent. If the modification wasn’t made through HAMP, the borrower must have made three monthly payments on time, and the modified mortgage must be current. If the loan is in a temporary or trial period, it isn’t eligible.

Q: What should I do if I think I’m eligible for the program?

Mortgage servicers—the companies that handle monthly payment collections—will ultimately decide whether borrowers can participate. Borrowers should talk to their mortgage servicers to see if they are eligible.

Because the program is voluntary, the investor that owns the loan will need to agree to the write-down. If there’s a second mortgage involved, then that creditor will also have to agree to participate. If the loan was bundled into a pool and sold to investors as mortgage-backed securities, then the servicer will have to decide whether to participate on behalf of the investors.

It’s also important to remember that because the program is new, servicers may be unfamiliar with it at first. While some servicers have hired lots of staff to deal with a crush of modifications and foreclosures, it could still be a while before banks are fully ready to refinance loans through the program.

If your bank says they’re not participating or that they don’t know about this program, you might refer them to some materials that have been issued to banks to help them become familiar with the program.

Q: How is this program different from HAMP?

The so-called “short refinance” initiative differs from other modification programs because it’s available only to borrowers who are current on their loans; so far, most modifications have extended help primarily to borrowers who are delinquent.

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Five Mistakes Home Buyers Make

Five Mistakes Home Buyers Make

Even in this market, buyers can get tripped up. Here are a few do's and don'ts for first-timers.

by Sarah Max Wall Street Journal Real Estate

Home buyers are an increasingly rare breed these days. Many who were eager to buy a house raced to take advantage of federal homebuyer tax credits. When those government perks expired in April, home sales essentially went into deep freeze, plummeting to levels not seen in more than a decade, according to the latest numbers from the National Association of Realtors.

Still, the Realtors project that nearly 4 million existing homes will sell in 2010. First-time buyers, without the burden of a home to sell, could benefit from the foul market–and the record low mortgage rates.

But woe to the overconfident buyer. Here are five common missteps that first-time home buyers make.

1. Snubbing the real estate agent

With so many websites offering a mass of data on listings, who needs an agent? Most people, actually. Finding a house and figuring out comps–the price of comparable homes on the market–is the easy part. Managing the nuances of offers, inspections, financing and all the other pivotal steps to buying a home is where many new buyers tend to get tripped up, says Shii Ann Huang, an associate broker with The Corcoran Group in New York.

When you hire an agent to act as your "buyer's representative," she's obligated to put your interests first, even if her commission is paid by the seller and based on the sale price. Skeptical? That's all the more reason to find an agent on your terms. Ask friends and acquaintances for referrals and interview two or three candidates before deciding.

But don't let the agent find you. When Viviane Ugalde and her husband, both physicians, bought their first home in Sacramento nearly two decades ago they made this mistake. "We stumbled onto an agent when she saw us peeking in the windows of an empty house for sale," Ms. Ugalde recalls. The agent, who happened to live on the same block, came out of her house (wearing pajamas), offered to show the couple around the neighborhood, and ultimately helped them find a house. Then the agent, who was new to real estate, neglected to show up for the closing. "It was scary and confusing signing what seemed like a thousand pages," says Ms. Ugalde.

2. Guesstimating how much you can afford

Many buyers mistakenly take a do-it-yourself approach to financing. They use online calculators to estimate how much house they can afford, dive into the house hunt and then get a dose of cold water when lenders refuse to qualify them for that amount. "The process is so different than it was four or five years ago," says Diann Patton, a broker with Coldwell Banker in Grass Valley, Calif. Not only are lenders reading loan applications closely, she says, they're verifying employment and running credit checks multiple times during the process.

Make a date with a mortgage broker or banker before you get serious about your search, says Ms. Patton. Remember, too, that the costs of buying and owning a home go well beyond the sticker price. While online calculators do take into account property tax and insurance, it's up to you to account for maintenance costs, moving fees and association dues.

3. Letting charm cloud your judgment

No one will fault you for falling hard for a charming older home. But, unless the house has been painstakingly remodeled or you're prepared to pay for repairs and upgrades, an old house can quickly lose its allure. Last year Alison Koop, a public relations manager for the University of Washington, came dangerously close to saying "I do" to a seemingly fabulous mid-century home in northeastern Seattle. Ms. Koop was so smitten with the big windows and vaulted ceilings in the living room that she neglected to notice the exposed wires, shoddy roof and other structural problems. Any delusions Ms. Koop had were laid to rest in the guest bathroom. "When the inspector turned the faucet on," she says, "the spigot fell off, hitting the floor of the tub with an exclamatory thunk."

If you're considering an old home, don't let the inspection be your last line of defense, says Jay Papasan, vice president of publishing at Keller Williams Realty. "Negotiate a long due diligence period," he says. That gives you time to get real estimates from contractors and back out if need be.

4. Focusing on the house, not the hood Of course, new homes aren't without their drawbacks. Recently, many newly built homes experienced serious problems with Chinese-made drywall, for example. Proceed with care whatever the home's age.

In hindsight, many buyers say they wish they'd taken their due diligence a few steps further to really get to know all the perks, quirks and hassles of living in a particular place. You can always fix up the house, but there's no easy remedy for annoying neighbors, oppressive homeowner association rules and marathon commutes. When Laurie Tarkan and her husband bought their first home in 2001 they were so infatuated with the circa-1924 three-bedroom cottage that–in addition to brushing over some of the headaches of an old house –they didn't give a whole lot of thought to its somewhat out-of-the-way location about a mile from downtown Maplewood, N.J., a popular New York suburb. "As a first-time buyer you're not aware of all the things you should think about that aren't about the house," says Ms. Tarkan, who after living in New York City for 17 years, still hasn't gotten used to driving everywhere.

Spend as much time as you can in your future neighborhood, ideally on different days and times. Eat in the restaurants, drop in a yoga class, test drive your commute.

5. Making arbitrary offers

With housing inventory running high and sales at record lows, in most markets, there's no shortage of houses for sale and sellers desperate to get out from under them–all the more reason to hold out for the right house and the right price. But when you find that perfect house, don't assume you can lob a lowball offer or make unreasonable demands. Even in hard-hit markets, nice houses in desirable neighborhoods are fetching multiple bids.

If the house has been on the market for months, you probably don't need to worry about other buyers lining up behind you. Make an offer based on recent sales for comparable homes, foreclosure activity and market trends, and don't be afraid to start the bidding low. If the house is fresh on the market (or recently foreclosed) and other buyers are circling the block, put your best foot forward but don't get suckered into a bidding war.

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Avoid foreclosure. Get the help you need.

Avoid foreclosure. Get the help you need.

If you are struggling with your mortgage payments or facing foreclosure, you may feel overwhelmed and frustrated. Many homeowners simply don’t know what to do or where to go for assistance, and they feel too helpless to take action.

Fannie Mae has created KnowYourOptions.com™ to help homeowners just like you. They have made it easy to find the information you need, so you can get help before it’s too late.

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