April 29, 2008

Me & My FHA Subordination Agreement

Filed under: FHA Loan

In July 2004 my husband and I purchased a house for $535K and put something like $120K down (from the sale of our condo). We got one of those horrible, awful option arms. It’s reset a few times and the minimum payments have nearly doubled, from about $1400/month to over $2700/month.

After about a year, we took out a $100K equity loan as well. It’s down to $94K and the payments are $700 or so.

Here’s the thing: we’ve been making minimum payments for almost 4 years and, because both of us have gotten steady raises/COLAs every year, we’ve been able to afford the minimum payment, but nothing more. We’ve NEVER been late. We just have 40K in negative amortization to our names and nothing to show for it, except a mountain of credit card debt incurred when our monthly income has been maybe $100 or so too short.

I recently refinanced my debt to save $200+/month so that it’s more affordable. The rate on our mortgage is currently 6.9% and is due to reset again in 2012. Until then, we are in limbo. Our FICOs are good – his high is 742 and mine is 699. No one, but no one, will touch us when it comes to refinancing because we have no lates. I had tried a short refi but that won’t happen. Our bank and 10 million others will not refi us the traditional way because we are so upside down. What do we do now?

Nora

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Hi Nora,

A couple things are unclear to me: (1) “I recently refinanced my debt to save $200+/month…” and (2) “the rate on our mortgage is currently 6.9%…”

Does this mean that you refinanced your mortgage or did you refinance other debt?

Also, “no one, but no one, will touch us when it comes to refinancing because we have no lates.”

That, in and of itself, is not a reason not to qualify for a refinancing.

I’ll answer with the assumption that you still have the horrible option ARM first mortgage and a HELOC second with a $94,000 balance and the property is “upside down” or worth less than the combined balance of the first and the HELOC.  This is a common situation for many homeowners today and I’d like to provide some welcomed news.

It is possible for you to refinance the first mortgage if the HELOC second mortgage will subordinate.  FHA permits a cash-out refinance at 95% of the appraised value.  The loan limits have been raised to as high as $729,750 for a single-family home in certain high cost areas.

The way to approach this would be to contact the HELOC lender and offer to pay them a large portion of the HELOC balance and have them close the line and subordinate the remainder of the balance.

Here’s the calculation:

95% * Appraised Value = FHA Loan Amount

FHA Loan Amount – Option ARM First – Settlement Costs = Net to HELOC

Call the HELOC lender and let them know that they can receive “Net to HELOC” now if they agree to subordinate.  You need to express to them that the alternative to not accepting this money now may not result in a favorable outcome for them.  In other words, you’ll need to be wearing your negotiating hat when you call.

Thanks for the questions and hope this helps.

Paul

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