August 10, 2010
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On September 7, 2010, non-FHA borrowers who are current on their mortgage and currently in a negative equity position (underwater) will be eligible for an FHA refinance loan, provided that their lenders agree to write off at least 10 percent of the unpaid principal balance on the first lien, according to a HUD mortgagee letter (ML  2010-23) released last week.  The letter provides additional guidance for lenders regarding the requirements and administration of the refinance program, which HUD and Treasury initially announced this March.

To be eligible for a new FHA loan under the program, the homeowner must owe more on their mortgage than their home is worth, be current on their existing mortgage, and occupy the property as their primary residence.  The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal of at least 500.

Participation in the program is voluntary and requires the consent of all lien holders.  The borrower’s existing first lien holder must agree to write off at least 10 percent of their unpaid principal balance to bring the borrower’s combined loan-to-value ratio to no more than 115 percent.

In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.

As part of the Making Home Affordable program, the Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishment of the liens.  The program is available for borrowers through 2012.

In a different mortgagee letter released last week (ML 2010-24), FHA eliminated the unlimited Combined Loan-to-Value (CLTV) ratio for refinance transactions.  The guidance states that, with the exception of streamline refinance transactions, the combined amount of the FHA-insured first mortgage and any subordinate lien may not exceed the applicable FHA loan-to-value ratio and the geographical maximum mortgage amount.  The new requirements will go into effect for transactions on or after September 7, 2010.