FHA Offers Alternative For Underwater Homeowners

FHA has help for borrowers that are “underwater” on their mortgages. Under the FHA plan, existing underwater homeowners can refinance their existing non-FHA loan into a FHA loan as long as they are current on their loan and their current lender reduces their total mortgage debt by at least 10 percent of the loan amount.

The total mortgage amount for the borrower after refinancing cannot be greater than 115 percent of the current value of the home, bring the loan amount for an underwater borrower closer to the actual value of their home.

Program highlights:

Existing loan must not be FHA-insured
Existing lender must agree to write-down the principal loan balance a minimum of 10 percent and the final loan amount cannot exceed 115 percent of the current value of the home (including and second mortgages). The refinanced FHA loan cannot be greater than 97.75 percent of the value of the home.
The refinanced FHA loan will be on standard FHA terms
Existing lenders can retain second mortgages on the property, but only up to a combined 115 percent of the current value of the home.

Homeowner Eligibility:

Homeowners must be current on their mortgage payments
Homeowner must occupy the home as their primary residence
Homeowners must qualify for new FHA loan under standard FHA borrower guidelines
Homeowners must have a FICO credit score of at least 500

What I like about this plan versus the governments Home Affordable Modification Plan which only lowers payments, is that the FHA program lowers the borrowers principal loan amount as well. I think this is significant and goes much further to helping a homeowner keep their home long-term, then simply lowering payments and leaving the borrower buried in debt on the home.