There’s a few major problems in the new FHA Short Payoff refinance that has been added to the “Making Home Affordable” family of solutions. I’ll later take the time to write the full details of this issue, but I need to get this message out over the next couple of days.
The new FHA program includes new FHA guidelines that no longer allow an unlimited Combined-Loan-To-Value on FHA loans. This is a HUGE problem. Let me explain.
In the past, FHA didn’t cap how much a homeowner owed on their house if the homeowner wanted to refinance the first mortgage as long as the new loan was within the 97.15%-97.75% of the home value. For instance, let’s assume a home buyer bought a $200k home with 20% down and ended with a $160k mortgage. The house appreciated to a value of $220k and the homeowner took a home equity loan of $50k for home improvements, making their new combined loan amounts $210k. Then the market declined and the new value is $170k, making the homeowner underwater on their home loans by $40k.
FHA would still allow this homeowner to refinance the first mortgage even though the second mortgage brought the home value to over 100% since paying off the $160k still had was within the 97.75% FHA limit.
$170k appraised value x 97.75% FHA LTV limit= $166,175…enough to pay off the $160k first mortgage owed.
The homeowner would still have their equity loan but this gives them an option to refinance their first mortgage, which may have a high rate or may be an adjustable rate mortgage set to adjust soon. The new FHA guidelines will not allow the value of the two loans exceed 100% UNLESS the 2nd mortgage company is willing to write down the balance.
Short payoff refinances sound good, but lenders often don’t want to take less than what’s owed. The old FHA guidelines actually helps more homeowners because more homeowners have 2nd mortgages where a short payoffs wouldn’t be considered. In fact, current FHA guidelines DO NOT PROHIBIT SHORT PAYOFFS so the new guidelines are only stricter than the old guides! How is this supposed to HELP homeowners? The guidelines are tigher and it’s now a part of the Making Home Affordable program? I’m still scratching my head on this one.
To stay on track, there is a VERY important message I need to get sent to every homeowner in America with a second mortgage. APPLY FOR A FHA LOAN AND GET A CASE NUMBER ORDERED NOW! Why? FHA will allow you to close under old or new guidelines if your case # was ordered before the deadline for the guideline changes. Right now, that date is September 7th, 2010, less than one week away! Even if you don’t qualify for a loan right now, credit is too low, equity is less than 97.75% right now, STILL GET YOUR CASE #. By ordering it now, you can always revisit this option in case your credit is improved or equity position has improved down the road. FHA doesn’t cancel case #’s and consumers who have a case # ordered are grandfathered into the old guidelines. This allows above 100% combined loan-to-value and still allows you to explore the short payoff options that are available.
If you talk to the right lender, you should be able to get this done in one day and for free. Again, all homeowners who have 2nd mortgages and may consider refinancing at some point, please get a FHA case # ordered in the next couple of days. Details can be read on this announcement letter from FHA: