FHA Underwater Refi option for a California real estate loan.

FHA has recently unveiled a real estate loan option for homeowners who are looking to obtain a lower interest rate on their current home loan but don’t have enough equity to qualify.  The maximum loan to value on the new loan is 97.75% meaning that the new FHA loan 1st mortgage loan can represent no more than 97.75% of the value of the home and if there is an existing second mortgage or HELOC on the property it can not be more than 115% of the value of the home in combined loans.  Since many homeowners owe more in mortgages than their property is currently valued, the existing lender would have to forgive at least 10% of the existing balance to make the loan work for those underwater.  But is that enough?

For example on a California real estate loan with a home value of $300,000, as deemed by a new appraisal, has a first mortgage balance of  $400,000 and a $30,000 second mortgage balance.  The maximum loan amount can not exceed 97.75% of the $300,000 value which is $293,350.  This would mean that the exising lender would have to forgive the difference of the $400,000 exisitng balance and the maximum loan allowable of $293,350 which is $106,650 or 35.5% of the balance of the loan!  In regards to a California real estate loan, this is common place and a first mortgage lender may not want to agree to forgiving this amount of money.  But when you really look at it, why would the bank want to spend additional money on legal fees on the foreclosure process, Realtor fees and take the chance on the homeowner trashing the property?

The borrowers current loan can not be with FHA currently and qualifications for the loan are standard FHA underwriting and a low 30 year fixed rate is available.  Those who are not paying PMI insurance right now on their existing loans would now have to pay FHA’s mortgage insurance, but still after having a chunk of your mortgage balance waived the numbers should hopefully work out for the homeowner.  Whether it’s a California real estate loan or any other state, let’s hope lenders receive this loan with a warm welcome, it could be a win win for all included but it’s strictly a voluntary option for lenders to participate in doing this loan.

Warmest KW

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