How to Refinance an Underwater Mortgage with FHA and HAMP

New Home Refinancing Program Different from HARP (Home Affordable Refinance Program)

Part of the Making Home Affordable initiative involves allowing borrowers with loans owned or serviced by Fannie Mae and Freddie Mac to refinance their mortgages, even if they owe up to 25% more than their properties are worth. That effort has previously stumbled, largely because borrowers couldn't save much by the time they paid the Fannie's and Freddie's increased refinancing fees--and many had difficulties with their mortgage insurers and second lienholders as well.

The new program takes the refinancing out of the hands of private lenders and puts it under the aegis of the federal government.

Less Hampered HAMP?

The new program allows borrowers to refinance out of old underwater mortgages to new FHA home loans at today's mortgage rates. The idea is to for lenders to decrease the chance of foreclosure by lowering mortgage balances so that either:

  • The loan principal balance drops below 97.75% of the home's appraised value (or by at least 10%)
  • Housing expenses drop to no more than 31% of the borrowers' gross monthly income

As a result, borrowers' payments would be more affordable and the mortgage balances more in line with current home values.

Funds from TARP will be used to compensate lenders for half of the principal write-downs. Lenders holding second mortgages must agree to subordinate them to the new first mortgages, and to write down balances if necessary so that the combined total of both loans doesn't exceed 115% of the property value.

New Program Is Voluntary

The new program is voluntary for both lenders and borrowers. So, if you can get a better deal with a standard HAMP modification, feel free to pursue that option. However, if your lender(s) won't agree to write down at least 10% of your principal balance, you won't be eligible for this mortgage refinancing program.

But why would a lender voluntarily agree to lower your loan amount? While lenders are being asked to forego some principal owed to them, they are also being offered the chance to unload many small portions of potentially toxic loans at a discount--which is considerably less costly than either foreclosure or selling the entire notes on the open market for as low as thirty cents on the dollar.

Who Qualifies?

Qualification for this mortgage refinance program is a bit different from the regular HAMP modification program. Here are some program highlights:

  • You must be current on your mortgage. Unlike "regular" HAMP, "underwater" HAMP requires that you be current on your mortgage payments. If you're already behind, you'll have to apply for regular HAMP.
  • You don't have to prove a hardship. Regular HAMP requires that you demonstrate a hardship beyond your control that has caused your income to decrease or your expenses to increase by 25%. Underwater HAMP doesn't require a demonstrable hardship.
  • You must qualify for the new loan under standard FHA underwriting guidelines. There is no interest rate reduction like the one you get with regular HAMP. You get the going rate for FHA mortgages, and your credit, income, and assets must satisfy FHA underwriters.
  • The property must be your primary residence. That's the same as for regular HAMP. If your property is an investment or rental, you'll have to negotiate your modification with your lender outside of any government-sponsored programs.
  • Your current mortgage cannot be an FHA home loan. FHA mortgages have their own modification program called FHA-HAMP. If you are an FHA borrower, there are already extensive loss mitigation programs in place to help you. Be aware: FHA is currently prohibited by statute from offering explicit principal forgiveness to FHA-insured loans.

How Can New HAMP Help?

Suppose you're a homeowner in Las Vegas, NV, and you bought your home for $200,000 a couple of years ago. You have a $180,000 mortgage, but the property is only worth $120,000 today. At a 6.25% interest rate (the going rate a couple of years ago), your principal and interest payment is currently $1,108, plus taxes, property insurance, and private mortgage insurance.

With the new HAMP program, your new loan amount can't exceed $117,300 (97.75% of $120,000), and at today's mortgage interest rates, you might be able to get an FHA loan at 5.25%. Your new payment might then be $648, plus taxes, FHA mortgage insurance, and property insurance--a savings of around $460 (about 40%!).

And it gets better: If you still ever need to unload the property, you can then sell your home without the headaches of a short sale.

When Will it Happen?

Your lender will inform you if it's participating in the FHA refinance program and if it has selected your loan for a principal writedown; contact them with any questions. The program is expected to be fully up and running by fall 2010.