October 6, 2008

FHA Short Refinance

Filed under: FHA Loan

I have a home that i refinanced apporximately 2 years ago as I was under the adjustable rate mortgage; I did some research while I was under this loan and the whole contraversy about the rates going up then scared me to refinance asap. I did the right thing, but HSBC refinanced my home at $170K after having it appraised in my area homes are only worth $150K at the time. Now the homes are onyl in the $130K range.

My mortgage payment is more than 31% of my salary and am in a position that I will no longer be able to afford as my student loans will be starting up.

I am currently under the 6 month mortgage modification program, trying to be proactive in this situation. Never been late, etc on my payments and hoping being proactive I can get a smaller interest rate without paying refinance loans, etc.

My credit is not the greatest and would be difficult to get a loan as I have tried, but since the housing market . values have dropped; I cnnot qualify, etc. What can I do?

Also, is there anything I can do as I think they over-appraised my home and fudged paperwork, etc to get me the loan. I feel thankful I got out of the adjustable rate, but at the same time feel ripped off that I am in home not worth anything anymore.

I am ready to throw in the towel and just rent the rest of my life. I need advice on where I can go, etc

Jim

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Hello Jim,

There are quite a few ideas thrown around in your question.  I’ll take these few paragraphs to discuss the new and improved ‘FHA short refinance’.  The 31% mortgage payment to income criterion you’ve cited above is a reference to the FHA Hope For Homeowners (H4H) program.  Specifically, the mortgagee letter from HUD reads:

As of March 1, 2008, the borrower’s aggregate total monthly mortgage payment debt-to-income ratio (DTI) on all existing mortgages must be greater than 31 percent of the borrower’s gross monthly income. The total monthly mortgage payment is defined as the fully-indexed and fully-amortized Principal, Interest, Taxes and Insurance (PITI) payment (this includes principal and interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens).

If HSBC agrees to permit an FHA short refinance through the Hope For Homeowners program (which is a big ‘IF’) then the HSBC loan will be written down to 90% of the appraised value.  You will have an instant 10% equity.  If you sell the property within the first year for the current appraised value then you will forfeit any right to the 10% equity to HUD.  This 10% equity is referred to as the ‘initial equity’ and the homeowner’s percentage of the initial equity grows according to HUD year after year assuming sale of the property as follows:

  1. During Year 1, 100% of equity is paid to FHA
  2. During Year 2, 90% of equity is paid to FHA
  3. During Year 3, 80% of equity is paid to FHA
  4. During Year 4, 70% of equity is paid to FHA
  5. During Year 5, 60% of equity is paid to FHA
  6. After Year 5, 50% of equity is paid to FHA

The above is HUD’s scale for ‘initial equity’ which is the difference between the FHA appraised value today and the new FHA loan amount.  Since the new FHA loan amount is at 90% LTV through the FHA Short Refinance program, that ‘initial equity’ is 10%.

Here’s an interesting piece of information.  If HSBC will participate in the FHA short refinance program through H4H (again a big ‘IF’) and accommodate you by writing the loan balance down to 90% of the FHA appraised value today, then your new mortgage amount will be based on that FHA appraised value (90% of FHA appraised value).  You mentioned that the appraisal was high on your last mortgage loan and you ended up with a high mortgage balance.  Now, if all goes well, and you refinance through the FHA short refinance H4H program, then you will have a low mortgage balance.  The pendulum has swung the other way.  As if that wasn’t enough helpful news, there is another facet to the H4H short refinance program with regards to your future sale of the property.  If you were to refinance today at 90% of the appraised value and you were to sell next month for a price higher than the FHA appraised value today, then you would keep 50% of the net difference between the future sales price and the current FHA appraised value.  FHA keeps the other 50%.  Not bad.

All in all, I like the H4H program; but bear in mind that it is a voluntary program and lenders aren’t usually willing to do anything voluntarily that reduces their profits.

Read: Hope For Homeowners or Loan Modification, TILA Rescission, and What Triggers TILA extended rescission?

Thanks for the questions and hope this helps.

Paul

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