What Is An Upside Down Mortgage – And How To Refinance It?

Upside Down Mortgage? There is Still Hope

Upside down mortgage refinancingWhen someone is upside down on the mortgage there are very little options to choose from. Too many homeowners who are currently underwater, are preferring to walk away from the mortgage than fall into a foreclosure. Having an upside down mortgage, means that a homeowner owes more to the bank than the property is worth. In this short review you can learn more about Upside Down Mortgage – And How To Refinance It?

What is an upside down mortgage situation? Financially it is the worst situation for all the parties, the homeowner is sinking, the bank is at a high risk position, and if the upside down mortgage is flushed down the drain, it is a financial disaster to everyone.

What Is An Upside Down Mortgage Situation

A mortgage can be called upside down when the amount owed by the borrower (homeowner) is exceeding the value of the property. For example if a person has bought a home for $280,000 and for this home they had to pay a regular 20% down payments of $56,000 and get the rest as a mortgage loan of $224,00.

At the beginning of the mortgage there most of the payments are set to cover the interest rate and a tiny bit of the monthly payment is to lower the principle. So when the housing markets crashed (as they did at 2008/9) the value of the property in our example may be well below $150,000! This leaves the homeowner with a huge mortgage ($224,000) and the lender with a negative equity home worth less than the borrower had borrowed. This is exactly a situation of upside down mortgage.

If the borrower fails to stay current on the mortgage, and they are too late on payments, the lender may begin a foreclosure process, but then the ‘prize’ will be a $150,000 home, when they lend $224,000… The homeowners are losing their home and all the cash down payment  they have invested in the house, together with their dreams and hopes.

There was a decrease in the amount of upside mortgages reported at 2010, but that was not because homes value raised it was because too many fell to foreclosure. The Obama Administration was trying to help upside down mortgage owners but the Hope for Homeowners  programs were not as successful as people hoped they would be.

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FHA Short Refinance – Obama Throwing a Life Jacket

The federal government has launched an emergency plan at 2010 to try and help home owners who are upside down on their mortgage to gain some hope. These program was the FHA (Federal Housing Administration) backing up mortgages for homeowners with a upside down mortgages which where not a FHA loans at the first place.

It is estimated that about  500,000 to 1.5 million homeowners would benefit from this FHA short refinance 2011 program. As many more home owners have now a negative equity mortgage (also known as ‘underwater mortgage’ or ‘upside down mortgage’).

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Upside Down Refinancing Is Not For Everyone

The two main faults in the underwater mortgage relief program (FHA short refinance) is that:

  • It depends on the lender to write off 10% of the principle, and not to many lenders are happy to join such a plan in which the entrance fee is 10% off their principle loan.
  • The borrower must be current and up to a long list of requirements which makes the upside down mortgage assistance suitable only for a few ‘rare’ borrowers.

Until February 2011 only a few lenders where willing to participate, it is reported that more and more lenders are now joining the HUD short refinance program, Wells Fargo and Ally Financial have both stated they will join a pilot program. Federal Housing Administration Commissioner David Stevens said testifying before a House subcommittee that “Based on additional discussions, several more lenders are in the process of developing the capability to utilize the FHA Short Refinance option by midyear and intend to collectively assist several thousand more homeowners”.

Will FHA Short Refi Save Your Upside Down Mortgage

The FHA short refi program is backed by the Treasury Department which set aside $14 billion in Troubled Asset Relief Program funding for it. In short the FHA short refi plan requirements are:

  1. The homeowner must be underwater but still current on the mortgage.
  2. The Mortgage to be refinanced must not be already insured by the FHA.
  3. A credit score higher than 500 is required.
  4. Max LTV (loan-to-value ratio) for the new refinanced mortgage may not exceed 97.75%
  5. Borrowers must occupy the property.
  6. Borrowers will have to pay transaction fees associated with refinancing and pay (FHA backed) mortgage insurance.
  7. Have an income that can support the current loan payments.

If you meet all these FHA short refinance requirements for 2011 than you may be eligible for a upside down mortgage assistance. The lenders must agree to write off at least 10% of the owed principle and if there is a second mortgage or lender then the second-lien holder must agree to the refinance too.

The FHA will check whether the combined (first and second mortgages) loan to value LTV exceeds 115%. If it does then either the first- or second-lien holder (or both) will need to reduce the loan balance further. As you see the lenders need to write off some mortgage money, and most of them do not have any incentive to do it, especially when the borrowers are still current! The federal government has published some incentives for the lenders to help them participate under these terms.

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Upside Down Mortgage Assistance Conclusion

Unfortunately there is not much to do when the mortgage is underwater. This situation is the worst case scenario for everyone involved. If financially you can not stay current on your payments, then the FHA short refinancing is not the solution for you, lender will not agree to write off 10% to someone who is behind and they will not approve the application.

If you have underwater mortgage but kept paying all the payments you may want to check with your lender, to see whether they are participating in the FHA short refinance program. You may want to send them the HUD mortgagee letter and let them know the list of lenders is growing constantly.

The HAMP program is helping to modify mortgages which owners are behind on their payments, so if this is your current financial situation, you may want to begin your search there.


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