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Borrowers who are underwater on a home loan basically owe more on their home loans than the property is worth on the current housing market. Over the last few years, this has become a growing issue faced by more homeowners due to a troubled market.

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FHA Loan Articles

News and Updates for Homeowners

FHA Policy Changes on FHA Short Refinancing

April 4, 2012 - Borrowers who are "underwater" on a home loan basically owe more on their home loans than the property is worth on the current housing market. Over the last few years, this has become a growing issue faced by more homeowners due to a troubled market.

The FHA began taking steps to help, including a 2010 plan called "FHA Refinance of Borrowers in Negative Equity Positions", also known as the FHA Short Refinance program. According to the FHA, the FHA Short Refinance Program allows "enhancements to the Federal Housing Administration (FHA) refinance program that allows responsible homeowners with negative equity an opportunity to refinance their homes."

Under the FHA Short Refinance program, borrowers with conventional loans who were underwater on their mortgages could save their property by refinancing into an FHA mortgage. "This opportunity allows only non-FHA insured loans to qualify for an FHA refinance loan provided that the lender or investor writes off the unpaid principal balance of the original first lien mortgage by at least 10 percent" according to the FHA.

A new FHA mortgagee letter announced changes to the FHA Short Refinance program. It has been extended to December 31, 2014, giving borrowers an extra two years to apply for an FHA Short Refinance loan.

Another change--one of the most important-- is the addition of a trial payment period which would make borrowers delinquent on their loans eligible for the FHA Short Refinance. According to FHA Mortgagee Letter 12-5, the new changes allow "borrowers who may have been delinquent on their existing loan, but who have successfully completed a trial payment plan that meets the following standards to be eligible for the program."

"The trial payment plan must require a payment amount which is consistent with the amount the borrower would pay if they were to refinance the mortgage under the FHA Short Refinance. If the borrower can make three consecutive on-time monthly payments successfully, they are now eligible for a FHA Short Refinance loan."

Contact your lender for details on how to apply for an FHA Short Refinance Loan--those who are looking for a new financial institution can shop around for a new participating FHA lender willing to consider an application for an FHA Short Refinance Loan.