Need an Underwater Mortgage Bailout? The FHA May Have Something for You

If you’re suffering from an underwater mortgage but continue to make all of your payments on time, the FHA may be able to bail you out. The administration is offering a refinancing option that could help homeowners whose home values have dropped far below their loan amounts via a new program.

The FHA Short Refinance Option

After the failures of the FHASecure and Hope for Homeowners programs, the government is taking another shot at homeowner assistance, this time focusing on those who need help staying current on underwater mortgages. Under the Federal Housing Administration’s FHA Short Refinance option, non-FHA borrowers could receive FHA-backed loans worth no more than 97.75 percent of their home’s value.

Now here’s where things get a little sticky: In order to receive this help, the homeowner’s lender must be willing to write off at least 10 percent of the principal balance. Also, the total debt tied to the home can’t be more than 115 percent of its value.

How to Qualify for Short Refinance

In addition to the criteria listed above, in order to qualify for a refinance loan, the homeowner must:

• Be current on payments for their underwater mortgage
• Refinance their primary residence
• Have a mortgage debt-to-income ratio of less than 31 percent
• Have a total debt-to-income ratio of less than 50 percent after the refinance
• Have a credit score of at least 500

To find out all of the details of eligibility, the FHA asks that borrowers contact their lenders directly.

If all goes well, the Obama administration says it hopes to help between 500,000 and 1.5 million homeowners. However, skeptics foresee the program helping closer to 300,000 since many banks may not be willing to write off the principal.

If nothing else, the hope is that some lucky homeowners will be able to take advantage of the ultra-low mortgage interest rates before they creep back up above 5 percent.