FHA Short Refinance: Does This Make It Real?

The FHA short refinance was one of the biggest kept secrets in the mortgage business these last few years.

Although few people have known about it, it has been entirely possible for someone to get an FHA refinance done for a property where the loan balance was more than the property was worth – as long as your current lender agrees to accept less than the amount you currently owe on your mortgage.

Getting an FHA short refinance has always been simple really – you just need to get your current lender to accept less than what the property is now worth as a payoff.

And it is a tricky thing to get done.

But the truth is that an FHA short refinance was (and is) possible to get done and I know this for a fact.

But the big problem to getting an FHA short refinance done was (and will be) getting the current lender to accept less than what is owed on the property in exchange for getting the borrower off their books and into a new loan.

And with Friday’s announcement, where the Obama Administration put some incentives in place to entice lenders to accept short payoffs, it is possible that more lenders who are currently collecting mortgage payments from people who owe more than their home is now worth will accept a short payoff and let the homeowner do an FHA short refinance.

Highlights of the new FHA Short Refinance Program

In order to qualify for the new FHA short refinance program, the following apply:

1. You must be able to fully document your income for your new loan
2. You must have a credit score of at least 500
3. You must be current on your existing mortgage payments
4. In order to be eligible for an FHA short refinance, the property must be your primary residence
5. Your current lender must agree to a principal write-down***

***This is the big deal and will be the make-or-break of this program.

Now, generally speaking in the past, the only reason that I saw lenders agreeing to a short payoff prior to this announcement was the fact that they had bought the loan from another lender for as little as 20 cents on the dollar.

A 20-cents-on-the-dollar investment can easily lead to a short payoff granted by the lender and here is what a real-life example of this would look like:

• Mortgage Company A is owed 100,000 for a mortgage.
• Property is now worth 50,000.
• Mortgage Company A has financial trouble and sells the rights to collect money on the mortgage to Mortgage Company B for 20,000.
• Borrower contacts new Mortgage Company B and offers to pay off the loan for 45,000 and has a new mortgage company to loan them money for 45,000 on a 50,000 property.
• Mortgage Company B says YES and books a 25,000 profit (they bought the loan for 20,000 and sold it for 45,000).

Although this is a simplified example, this kind of thing has been going on for at least a year now.

But very few people knew about it.

Until Friday.

Now that the Government is putting incentives in place for Mortgage Company A to agree to a less-than-amount-owed regarding payoffs, will it help those people who are under water?

Probably not any more than it would have in the past.

You see — the big secret in all of this is — it all depends on what the basis is for the current mortgage holder on your mortgage.

If your current lender can make a profit approving a short payoff, chances are they will approve it.

And if your current lender can not make a profit approving a short payoff, chances are they won’t.

And from what I can tell, the Government throwing a couple of thousand dollars to a lender who approves a short payoff is far different than a lender who stands to double their money on an investment they just bought for 20 cents on the dollar.

But I have been known to be completely wrong on occasion.