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September 21, 2010 > Another option to avoid foreclosure

Another option to avoid foreclosure

Submitted By Blaison Samuel, Prudential California Realty

The Obama administration has launched enhancements to the Making Home Affordable Program and Federal Housing Administration (FHA) refinance program called "Short refinance" which will help responsible homeowners whose mortgages exceed the value of their homes. This program could help borrowers, who are current on their mortgage, avoid strategic default and remain in their homes; such homeowners might otherwise abandon the property because they are "under-water," or have negative equity, and are on the verge of finding it difficult to maintain mortgage payments.

Borrowers current on their mortgages can qualify for an FHA refinancing loan if the senior lender agrees to write off at least 10 percent of the unpaid principal balance of the existing loan. This short payoff serves as payment in full for any debt extinguished.

Homeowners must obtain the consent of their lenders whose participation in this program is voluntarily. Borrowers in arrears on the existing mortgage to be refinanced do not qualify for the program.

The property must be the homeowner's primary residence (1-4 units). Investment properties do not qualify. Standard FHA eligibility criteria apply to the refinancing loan which will take the place of the existing senior loan and is limited to a maximum loan-to-value ratio of 97.75 percent. There will also be monthly mortgage insurance with this FHA product. Applicants must have a minimum FICO score of 500. The existing loan must not be a FHA-insured loan.

Existing junior loans still attached to the property must be re-subordinated. Their total must not exceed 115 percent of the property's value. If such a situation arises, either the senior or junior lender(s) or both must agree to reduce their principal amounts further.

How many lenders will participate in this program to allow at least a 10 percent reduction in principle to homeowners remains to be seen. According to the Department of Housing and Urban Development, the enhancements could help around 500,000 or more homeowners. Not everyone who is current with their mortgage repayments will qualify but the program's first focus is homeowners who have not missed any payments, have negative equity and are at risk of default.

Anyone interested in this program should contact their lender directly and ask about eligibility for the FHA Short Refinance program and ascertain if the lender is a participant. Realtors, government and homeowners hope this program works and will avoid foreclosure to aid recovery of the housing market.

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