With a large number of homeowners still dealing with underwater mortgages (owing more than their home is worth), the Obama Administration is looking for more opportunities to help.  While some struggling homeowners benefit from the Making Home Affordable Program, (HAMP)with loan modifications designed to keep them in the home without foreclosing, new initiatives are designed to keep people from voluntarily walking away from their homes because they’re paying more than their home is worth.  Under the new government program, FHA’s “Short Refinance” program announced in March,  an estimated 500,000 and 1.5 million homeowners will be helped with a mortgage refinance.

Beginning in September, homeowners who are eligible can begin modifying their home loan.  Other programs, including the Making Home Affordable initiative, were only available to homeowners who were behind with their mortgage payments.  This new initiative requires that homeowners are up to date on their mortgage payments, meet minimum credit score requirements of a 500 FICO score or better, and have proof of their ability to repay the loan.

To be eligible for the loan modification, two criteria must be met:

• the mortgage must be underwater
• the existing lender must agree to reduce their mortgage loan by at least 10%

If both of these eligibility criteria are met, the underwater homeowner can refinance their mortgage at the current interest rates with a FHA backed home loan.  Homeowners are required to pay the refinancing fees and add mortgage insurance to their payments to help guarantee their loan.

If you already have an FHA mortgage, you are not eligible to participate in this program.  This is unfortunate, as nearly half of all mortgages in the United States are held through Freddie Mac and Fannie Mae (FHA loans).

Critics of this new government attempt of assisting underwater homeowners point out that lenders may not want to cut the loans by at least 10%, which will eliminate a homeowners eligibility to participate.  The lender must reduce the loan by at least 10% to bring the new loan balance to no more than 97.75% of the current value of the home in order for a homeowner to qualify for the mortgage refinance.

Lenders would face some large losses in order to help consumers take advantage of the mortgage refinance; and they would lose the customer to an FHA lender.

Lenders may be more apt to take a loss on loans that have already been modified through the HAMP or other modification programs since they are the most at risk to foreclose and cost the lender more money.  The new modification program is available to those who have already modified under HAMP, but their modification must be finalized for a minimum amount of time, and they must now have current mortgage payments.

Another consideration of the mortgage refinance program is that it does effect your credit score.  The IRS considers the 10% loan reduction a debt forgiveness; so the amount you have forgiven during the refinance will be considered taxable as income.