FHA Announces Refinance Option for Underwater Homeowners

Not late on Mortgage payments, but too underwater to refinance and take advantage of record low interest rates? FHA will be offering an alternative to underwater homeowners. Of course you may want to read the fine print before rushing to your lender to refinance.

This new refinance loan offered by FHA is available to owner occupants, you cannot be late on payments, you must be able to qualify for a loan (good credit), and your current lender must be willing to accept a short-payoff on your current mortgage loan in order to complete the FHA refinance. This is where the fine print comes in...if you read the FHA Mortgagee Letter in full you will see at the bottom of the six page document "Additional Items of Note" where it states: "Mortgagees must make borrowers aware that, as with any loan forgiveness action, the short refinancing under this program may be reflected as a negative feature on a borrower’s credit score. Mortgagees must also advise borrowers that they need to consult with their tax advisors regarding the cancellation of debt and possible tax consequence."
So, in essence this will be reported the same as a short-sale would on your credit. If you want to stay in your home, you are current on your mortgage, and see that falling behind is eminent then this option might work for you. I think this is a very viable option for people who are current on their loan and want to stay in their home and do not mind a short-payoff on their credit report.

The problem I see is that most people who contact me for a short-sale are already late on their payments and can't take of advantage of this program. Even if they catch up on the payments they have missed their credit score would more than likely be too low to even qualify for this loan. The other problem is that the homeowners who are underwater and current on their payments still have not defaulted yet because they want to preserve their credit. Of course they would love to refinance and take advantage of low rates but not to the detriment of their credit score. I bet if lenders offered some of these homeowners current interest rates and did not even lower the principle balance they would have better luck. What they are not understanding is that the majority of the people who are not late on their mortgage are still paying because they do not want to damage their credit.