About Government Refinance and Home Purchase Programs

Information and Updates on Government Mortgage Programs
Filed under Government Mortgage Financing Programs News

As we have noted here in the past, with the failure of the Hope For Homeowners program in the Fall of ’08 there haven’t been any reliable refinance options for people who have conventional mortgages and owe more than their home is currently worth. For the last few months we have suggested people contact their lender about a loan modification.

However, there is one possible solution that we have only recently started looking at again. According to the FHA regulations, as long as the FHA loan is in first lien position and does not exceed 97% of the current value of the home FHA does not care if there is a second mortgage behind it. Here is an example:

1st mortgage = $185k conventional loan at 7% (no late payments)
2nd mortgage = $65k ARM loan at 9% (no late payments)
Current appraised value of home = $200k

In this example the homeowners are in some trouble. They owe $50k more than the house is worth. But here is where FHA can step in. Assuming these homeowners meet FHA income and credit requirements, they could refinance out of that 7% first mortgage and get an FHA loan at a much lower rate (based on rates this week at least).

The Catch

But here is the catch: When a first lien/mortgage pays off the second mortgage automatically moves into first lien position and FHA insists on being in first lien position.

The Solution

The solution to this problem is to convince the second mortgage holder to stay in second lien position for the refinance. This is called subordinating the loan.

For much of 2008 it was difficult to convince second mortgage holders to subordinate their loans. But as the economy has continued to weaken more and more second mortgage holders are willing to consider it now. The logic is pretty simple: If the family in our scenario above foreclosed and after all the costs the home sold and cleared $180k for the banks, that entire amount would go to pay off the first mortgage and the second mortgage holder would get nothing. So it is very much in the interests of second mortgage holders to agree to subordinate their loan if it decreases the chances of a foreclosure.

If you are in a situation where this FHA feature could apply and be useful to you, please contact us in the sidebar and explain your situation in the notes section.

Comments (0) Posted by G.R.A. Admin on Sunday, January 25th, 2009

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