FHA's Help for Negative Equity

In August the FHA released a Mortagee Letter offering a refinance program for those who are underwater on their mortgage. So, how are the benefits actually determined in this case? The true success of a plan like this will only be measured by its outcome, and at this point the companies that hold these liens need to be willing to sacrifice a certain percentage of the balance on the loan. This program is not applicable to everyone unfortunately; it will only apply to those who were issued a case number as of September 7, 2010 and get their loans closed by December 31, 2012.


However, as with anything it is best to know the details before you get too excited and carried away. I wouldn’t necessarily describe it as a catch, but there are some things you will want to keep in mind. First of all, the loan you are in cannot be an FHA loan, and your payments must be on time. That’s right; don’t think that because you got frustrated that you could quit making payments and all is forgiven just because you thought the banks were greedy. I can understand your aggravation, but remember you signed the papers with the understanding that you were responsible for paying the loan back.

The maximum amount of money that they can loan you will only be 97.75%, with a maximum combined loan to value of 115%. One would think that this would have been ousted, but keep in mind that there are many who had taken out second mortgages, and had purchased homes with a second broken down into 20%, with the first mortgage being at 80%. This was to ensure that the borrower wouldn’t have to pay PMI. Also, keep in mind that the company that holds your second mortgage must allow the first to remain as the first mortgage. This is what loan officers refer to as a “subordination”.

Once a loan is accepted or approved by the lender, no income or credit verification needs to be done. Here is where things get tricky; isn’t this where the problems started before? You may not agree, but I have found that to be true only on a case by case basis. While I don’t agree with everything banks have done, I have to say that those who have stronger credit up front typically don’t default. Those who make an investment up front on their purchase usually don’t default, while those who aren’t current usually revert back to a very low credit score and so forth. There is always a trend that we can see, and that is what we need to be looking for.

-Mayer Dallal