New FHA Refinance Program

New adjustments to Federal Housing Administration (FHA) programs will allow hard-working homeowners to have access to more refinancing options. If you are a homeowner who owes a sum that’s greater in value than your home, you may qualify for mortgage refinancing.

The goal of these changes is to give homeowners a greater opportunity to restructure and refinance their qualifying mortgage loans. This can be done if the borrower is up-to-date on the mortgage and the lender enacts a 10% reduction of the amount owed on the original loan.

Also, the new FHA loan must have a lower balance than the home’s current value, and the borrower’s total mortgage debt after refinancing must be less than 115% of current home value. (This debt would include all mortgages in the homeowner’s name, whether one or multiple.)

Homeowners with troubled mortgages can now lessen the burden on their shoulders. They can resume paying their mortgage at a monthly rate that they can afford, leaving behind debt and regaining equity. And with more honest working families avoiding foreclosure and staying in their homes, the future for housing markets should continue to look bright.

The New FHA Refinance Program in Greater Detail

1. FHA Refinance Option for Underwater Loans — Encouraging Responsible Restructuring and Refinancing

This option may be selected voluntarily by lenders to allow more cooperation with borrowers who have “underwater” mortgages. Since the FHA refinance is a voluntary option, it will not necessarily apply to all borrowers who fit the criteria below.

Loans can be refinanced to a value that is lower than that of the home with the standard FHA refinance loan.

Lenders must write down the principal of the first mortgage by at least 10%, but the actual reductions will likely be much greater.

Homeowners will now make monthly payments at today’s low interest rates, not at the high rates in effect when they first took out their loans. Their monthly payment on the refinanced mortgage should not exceed 31% of their income.

Who is eligible?

Homeowners who are current on their mortgage payments, who live in their home as their primary residence, and who have full proof of income and can pass a credit check (i.e. have a minimum credit score of 500).

This short refinancing will be reflected on the borrower’s credit score, as is standard for any act of loan forgiveness.

Homeowners whose loans are not insured by the FHA at the present are still eligible for refinancing.

2. Incentives for Principal Write-downs on Second Liens

Homeowners can have a second mortgage on the home, but in order to qualify for refinancing, all mortgage debt will need to be rewritten to no more than 115% of the home’s current value.

3. Transparency on the Impact of Refinancing

Each quarter, the FHA is obligated to disclose data on the quantity of loans, the average percentage written down, and quantity of principal reduced.

4. TARP-funded Support for Expanding the Impact of Refinance

Up to $14 billion in TARP funding will go towards incentives for writing down second liens, encouraging servicer participation and helping to cover possible losses on the loans.

This program has become FHA Home Affordable Modification Program (FHA-HAMP).

FHA Rolls Out New Refinance Program for Multifamily Loans

A pilot program being enacted by the FHA will effectively speed up the refinancing process under the Low-Income Housing Tax Credit Program, or LIHTC. The pilot covers multifamily housing loans in four test cities — Boston, Chicago, Detroit and Los Angeles — and, if successful, it will reduce the average streamline approval time from a year down to only three or four months.

Refinances through LIHTC are required to be streamlined in accordance with the Housing and Economic Recovery Act of 2008. According to the FHA, it’s necessary to accelerate the approval process for the sake of meeting deadlines pertaining to credit allocation and bond reservation. This means that borrowers have a better chance of securing tax credits for housing that they can afford.

LIHTC covers Section 207 and 223(f) mortgage loan insurance for the acquisition or refinancing of pre-existing multifamily rental homes.

To be eligible for this insurance, a property must:

•  Not require extensive improvements or repairs.
• Have been constructed at least three years before applying for mortgage insurance, or otherwise not been extensively rehabbed within the last three years.
• Consist of no fewer than five residential units, each having a full kitchen and bathroom.
• Allow for a minimum mortgage term of ten years.

The maximum life of the mortgage allowed is either 35 years, or, if lower, 75% of the estimated duration of the physical improvements. The highest mortgage amount allowed is typically 85% of the appraised value by HUD, but may be set lower according to the borrower’s net income or local statutes.

The Fiscal Year 2011 saw FHA increase its endorsements to $561 million in LIHTC projects. FHA’s multifamily refinancing pilot may increase that amount even more to the benefit of homeowners this year.

“It has become clear that we need to rethink our process at FHA if we hope to leverage LIHTC to the maximum degree possible. This pilot program will test our ability to significantly cut our review process so we can put people in affordable homes and provide unique financing options for developers.” –Acting FHA Commissioner Carol Galante