New FHA Short Refinance Program

HUD recently announced a new refinance program for underwater borrowers. They would be able to obtain, with their existing lender's cooperation, a refinance into an FHA loan. You must be current and owner-occupied and owe more than the house is worth. The existing lender must agree to reduce the principal by at least 10% (hence the name short refinance) and the resulting LTV must be no more than 97.75%. Obviously the loan will have mortgage insurance and you must meet the FHA underwriting guidelines. If you have a second, the new first and the existing second (subordinated to the new loan) must be no more than 115% of the appraised value. There is a very good FAQ here. There is also information on the HUD website.

This program seems like a good but as with most of the foreclosure "rescue" programs limited. It may fill a gap in the existing programs. Unfortunately at this time Fannie and Freddie do not appear to be participating, but they also have some similar programs. This new FHA loan does give the underwater borrower with a lender who is willing to work with the new program an opportunity to avoid eventual foreclosure or short sale.