Just pre-approved for an FHA Short Refi

[Jimbo35]

Please excuse me while I do a brain dump. I've lurked on and off here for a while, but I've had lots to think about over the last 24 hours and just need to pour it all out. Hopefully others find my recent experiences useful.

Some background on my situation:

My purchase price (2007): $575k
1st Loan: GMAC, $460k, Jumbo (conv limit is $417k in OR), 6.375%, interest-only, $2443/mo PI (actually just I)
2nd Loan: Greentree, $86k, HELOC, 7.875%, 15yr balloon, $595/mo PI
Both are original purchase loans.
Current home value: Not 100% sure, but I'm guessing $420k +/- $20k (I'm the smallest house in a VERY affluent neighborhood, custom-built by a single-mom/teacher before I bought it, and everything's bigger & more expensive than mine; comps are hard to find).
I am current on all payments and while money is tight, we are managing (even though it feels like I'm getting kicked in the gut every time I make these $%!& mortgage payments).

A couple days ago, I finally stopped feeling sorry for myself, got off my duff, and called GMAC Mortgage to see if there was anything they could do. Part of my motivation was reading about the FHA Short Refi program, which everybody considers worthless because Freddie/Fannie aren't participating, but I read a couple blog posts indicating that GMAC/Ally Financial is one of the big banks that's giving this a go, and since I have a Jumbo loan I figured what the hell.

First useful thing I learned: After calling their generic customer service number and asking about potentially doing a short refi or something else to give me mortgage relief, they transferred me to their mortgage broker department, but warned me that hold times could be long, so I should write down their direct number:

1-877-586-3651

I did not see this number anywhere on their website.

After holding about 5-10 minutes, I got a hold of Paul, explained my situation, and he was sympathetic and said that they may or may not be able to help depending on the situation. First thing he did was take my account number, punched it in, and said that yes, the investor on my loan is accepting short payoff amounts. After telling me this, he said that there are usually several options available, and that one of the guys in the office specializes in this sort of thing, but he was working on other stuff and would call me back. So I gave my number, and was told that Fred would call me back shortly.

About an hour later, Fred called me back. Without any prompting from me, he said that the FHA Short Refi program was my only option based on my estimated value and the remaining balance on that 2nd mortgage. We spent time talking about the home's value, and he said alot depends on what that comes to. If we assume a $420k value, then he would try and negotiate a $400k payoff of the first in order to bring the total LTV below the required 115%.

He also threw out a potential rate of 4.875%. At this point, I was getting very excited about the idea of significantly reducing both my principal AND my interest rate.

Unfortunately, there are two signficant catches. One of them I expected, and that was going from an interest-only payment to P+I. However, the P+I payment is actually $300 LESS than my current interest payment, which of course is awesome. But the second catch is that I'm now in FHA-land at 96% LTV, and that means mortgage insurance of almost $400/month based on the loan amount. So my net payment will actually be increasing by almost $100/mo. Of course, I'll have almost $500/mo going towards principal and going up from there, but this is a small cashflow issue (not to mention the ironic fact that principal paydown may not be a good thing if values keep declining. Oh, and that my taxes will be going up with such lower interest payments). And one other annoyance is that I'll have to include taxes and insurance in my payment, which I've gotten really used to handling on my own by using portions of regular bonuses and stock grants I get from my employer. Add it all up, and I'll be going from $2443 interest-only to ~$3,100 PITI.

Still, it's at this point where I scream to myself, what are you waiting for? They're wiping out 60 thousand freaking dollars and cutting my interest rate by 1.5%. Are you daft? TAKE THE DEAL! So I went ahead and told Fred to go ahead with this, even while the back of my mind was frantically working out how I could rearrange my budget to handle the larger total payment. He took an application over the phone, and told me he might not hear from the investor until Monday.

Well, the very next day he called to say that I was pre-approved. The investor agreed to a $400k payoff, and all the paperwork was getting emailed to me. Upon inspection of the paperwork, I see that he's locked in a rate of 4.75% for 90 days (so my payment will be about ~$40 less than the 4.875 we talked about), and furthermore I see that the loan reduction is actually $67,000, with the extra $7,000 being applied to my closing costs. The final new loan amount comes to $404,000, with an extra $4k rolled into the loan for the required 1% up-front FHA mortgage insurance premium.

That's where I'm at right now. I'll be signing the paperwork and sending in income docs over the weekend, after which an appraiser will come by the house (the house's value is still the million-dollar question in all this). I find that there are still questions lingering in the back of my head:

• Could I get a lower rate? I see that advertised rates are currently in the 4.3-4.5 range. Maybe FHA is a little higher?
• Should I shop around? One thing about this FHA program: I can use any lender for the new loan. But the fact that they have a direct line to the note holder and can negotiate with them seems like a big plus, and I wouldn't want to jerk them around too much if that payoff gets put in jeopardy. And Fred has been helpful. Furthermore, if they're still evaluating this program, it seems like I should make it turn out good for them as well.
• Will I be able to refinance again in the near future to reduce that mortgage insurance premium? Based on what the 1st's LTV will be, I doubt I can eliminate it, but maybe conventional mortgages have lower PMI rates?
• Can I still settle my 2nd after doing this? Up until now, my main strategy was going to try and settle my second per the excellent "Strategy for settling your 2nd" thread. However, I thought it would be prudent to at least check with my 1st to see if anything can be done while my credit is good. Doing this refi will cause the second to have a small amount of equity again ($16k out of an $83k balance), and that equity could grow as I pay down the principal. It sure would be sweet if I could both do this refi, AND settle the 2nd for 10-20%. Not sure if that's possible.

I will be doing my best to answer these and other questions for myself as I move forward, and I will try and keep my progress updated here. If anybody has any thoughts or suggestions, I would love to hear them, but in the meantime thank you for allowing me to get my thoughts written down. And wish me luck!

[Cat Damiano]

Hi Jimbo35,


I do wish you Good Luck through this process. I would like to point out that the taxes will be paid monthly through your payment now so the amount of money you were paying in lump sums through bonuses and such could still be set aside and made available for that same purpose. If the second will have some equity when all is said and done it will then be what is called "in the money" and there is a different thread regarding that type of settlement.

http://www.loansafe.org/forum/debt-s...money-2nd.html


Please keep us posted on your progress.

Here is some information on when you would be able to remove the mortgage insurance and save that money per month.

How Soon Can You Remove Mortgage Insurance on an FHA? | eHow.com

[Jimbo35]

Here's an update on my short-refi. Short version: I got approved, but for a slightly higher payoff amount (~$40k discount instead of ~$60k).

My appraisal came back at $464k. Quite a bit different than the $420k I was approximating. Personally, I think it's bogus; I could never sell this house for that much. But it is what it is.

But here's the weird thing - Even though the appraisal came back slightly higher than my $460k 1st mortgage balance, they are STILL allowing me to do an FHA short refi. Rather than do a $400k payoff, they bumped it up to $417k, which is the limit for conforming loans here in Oregon (anything higher is a jumbo). According to Fred, they would have gone higher, but that's the limit they were stuck with. I didn't ask why they were still willing to do a short-refi at all since their loan wasn't technically underwater. I guess there's some serious bucks being offered in this program to make up losses?

After the 1% ($4k) up-front mortgage insurance cost that gets rolled into the loan, my new loan amount will be $421k, down from $460k. Furthermore, I will be going from a 6.375% rate to 4.75%. Overall, this makes me very happy.

Of course, paying $380/month in mortgage insurance is a bitter pill to swallow, but I talked to a loan broker my wife knows, and he observed that my new loan will be less than 90% LTV, and my CLTV based on the new appraisal is only at 107%. After 6-9 months of making payments to get below 105% CLTV and recover from the credit hit I might take from the short refi, he said that he has a product that will lend up to 95% with no PMI (it will be a slightly higher rate, but at least that's tax deductible). So hopefully the mortgage insurance with only be a temporary thing. I did also ask this person some of the same questions I asked above, and he said he's never heard of anybody using this program, and encouraged me to just go for it.

One thing I don't understand is that the FHA short-refi program requires knocking 10% off the 1st mortgage amount, but they only knocked off 9.4%. Either that's close enough, or somebody's bad at math. I'm wondering if this might get kicked back by FHA at some point for a slight adjustment.

I just got my notice of approval and commitment letter today, which I have digitally signed so they can go forward with processing the loan. Now it's back to waiting!

[Cat Damiano]

Thank you for the update, you are definitely closer to a success story on the FHA short refi program than anyone else.

[Pixel67]

Here's an update on my short-refi. Short version: I got approved, but for a slightly higher payoff amount (~$40k discount instead of ~$60k).

My appraisal came back at $464k. Quite a bit different than the $420k I was approximating. Personally, I think it's bogus; I could never sell this house for that much. But it is what it is.

But here's the weird thing - Even though the appraisal came back slightly higher than my $460k 1st mortgage balance, they are STILL allowing me to do an FHA short refi. Rather than do a $400k payoff, they bumped it up to $417k, which is the limit for conforming loans here in Oregon (anything higher is a jumbo). According to Fred, they would have gone higher, but that's the limit they were stuck with. I didn't ask why they were still willing to do a short-refi at all since their loan wasn't technically underwater. I guess there's some serious bucks being offered in this program to make up losses?

After the 1% ($4k) up-front mortgage insurance cost that gets rolled into the loan, my new loan amount will be $421k, down from $460k. Furthermore, I will be going from a 6.375% rate to 4.75%. Overall, this makes me very happy.

Of course, paying $380/month in mortgage insurance is a bitter pill to swallow, but I talked to a loan broker my wife knows, and he observed that my new loan will be less than 90% LTV, and my CLTV based on the new appraisal is only at 107%. After 6-9 months of making payments to get below 105% CLTV and recover from the credit hit I might take from the short refi, he said that he has a product that will lend up to 95% with no PMI (it will be a slightly higher rate, but at least that's tax deductible). So hopefully the mortgage insurance with only be a temporary thing. I did also ask this person some of the same questions I asked above, and he said he's never heard of anybody using this program, and encouraged me to just go for it.

One thing I don't understand is that the FHA short-refi program requires knocking 10% off the 1st mortgage amount, but they only knocked off 9.4%. Either that's close enough, or somebody's bad at math. I'm wondering if this might get kicked back by FHA at some point for a slight adjustment.

I just got my notice of approval and commitment letter today, which I have digitally signed so they can go forward with processing the loan. Now it's back to waiting!

Jimbo, were you successful in getting this pushed through the process? I am also investigating this and would like to hear some feedback before I put a lot of effort into it.

[Jimbo35]

And....it's done!

Closing was actually the week before last, sorry I didn't stop by sooner for an update.

My HUD settlement shows the final payoff amount as ~$407.5k (balance was $460k). Turns out this payoff amount is what must meet the 10% reduction requirement in the FHA Short-Refi program (which this does).

All of the closing fees and escrow deposit (including taxes that are coming due) got added to this to bring it to the conforming limit of $417k, and then the 1% up-front FHA PMI fee was added on top of that to bring my new loan balance to $421k. So in the end, I ended up with a $39k principal reduction, and a rate reduction from 6.375% to 4.75%. An added bonus is that this year's property taxes were included in the closing costs and rolled up into the loan, so the money that I was saving up to pay taxes next month will now be used to cover the "TI" portion of my PITI payment for a while.

I did have to bring some money to closing; their loss-mitigation department wanted $2,450 from me. The fact that this is so close to my original $2,443 mortgage payment leads me to believe that they simply didn't want me to go a month without making a payment, which one usually does on a refi. So paying this at closing was just like making a mortgage payment, and wasn't a big deal.

To recap:
Old loan: $2,443/mo payment, ALL of which was interest on my interest-only loan.
New loan: $3,193/mo payment, which includes interest, principal, FHA PMI, taxes, & insurance.

My cashflow lessens by $750/mo, but that will get covered by the money I was saving for my $6,900 tax bill.

Of most significance to me is that an amortization schedule shows that I will go from paying $0/mo in principal to $529 in the first month and going up from there. The peace of mind in knowing that I will finally start to actually own my home is immeasurable.

Of course, I'm still underwater on my 2nd, but I'll get to that in due time. Next steps are paying on this loan for a while to let my credit recover and get back under the conforming limit, and then see if I can refinance into a non-FHA loan and get rid of that nearly $400 in PMI. Once that's done, I'll see where the market's at and see if I can start negotiating for a settlement of some kind on my 2nd since I won't care about my credit at that point.

Thanks for letting me journal my experiences; hopefully this is useful to somebody out there. My advice is if you happen to be in the small realm of people who have a non-comforming loan, or there's some other reason why your mortgage isn't owned by Freddie/Fannie, call up your mortgage company and see if they'll participate in the FHA Short Refi program. Working with GMAC on this really was a breeze, and it's a crying shame that everybody isn't able to do this....

[Cat Damiano]

Hi Jimbo35,


Congratulations on your FHA Short Refi!! That is quite an accomplishment considering they are few and far between. Good Luck to you in your future endeavors. Thank you for sharing your story.

[Jimbo35]

I have another update to my somewhat unique situation, as well as a problem and a question.

It's been about 6 months since my short refi closed, and I'm now looking into refinancing into a new conventional loan to eliminate my hefty PMI. My mortgage broker friend has a program that will loan up to 90% LTV with no PMI, but at the cost of a slightly higher-than-market interest rate (which is fine with me, since that will be deductible, whereas PMI is not because of my income level).

But there's one big drawback to my short refi: On my credit report, my old loan shows up as “SETTLED FOR LESS THAN FULL BALANCE". According to my mortgage broker, in the lending world this is interpreted as a modified loan. And also according to my broker, the banks he's contacting won't touch me because it appears I have a loan mod on my credit report. And explaining to them that there was no modification, but rather a refinance complete with a new loan origination (and the pile of closing docs to prove it), apparently does absolutely no good.

So now I have a question for the board: Do I have any options here to improve my situation? Does "SETTLE FOR LESS THAN FULL BALANCE" sound like the right entry to put on my credit report for a short refi? Is there anything I can ask my bank to do to change this status on my credit report somehow?

My suspicion is that this status makes perfect sense for my old loan and is the right thing to classify it under, but because hardly anybody is able to do an honest-to-god short refi, all these bank underwriters simply assume it's a loan mod.

I think what I have the most trouble with is the term, "settled". There was no settlement, as I was always current on my payments and never in danger of defaulting. I wanted to refinance, and through this FHA program, the payoff amount ended up being less than the principal balance I owed. I suppose I'm probably splitting hairs, but that doesn't strike me as a settlement.

Anyway, if anybody has any advice for either modfiying my credit report somehow, or obtaining a new refi loan on a home that appears to have a loan mod on it, I'd really appreciate any pointers....

- Jim

[mpaterso]

Jimbo, Thanks for your posting(s). I've been following your situation with great interest as I'm in a very similar situation as far as my mortgage(s), the size of my mortgages, and the value of my house. I've even inquired with BofA, the servicer of my 1st loan, but unfortunately BofA is NOT participating in this program at all.Unfortunately when you took this deal, GMAC wrote off $39,000 that you originally borrowed. Therefore the note on your credit report is correct, because your old loan was settled for less than the amount owed. Whether $39,000 in loan forgiveness (and the reduction in interest rate) was worth the negative impact on your credit score, you will have to decide. It seems now that you want to refi again, it is somewhat painful. But at least you're in a better financial situation! Basically you have to remember that you did a SHORT SALE without the SALE - but with a REFI at a market rate. Unfortunately the SHORT part is what is hurting your credit. That will take at least a few years to recover from.I would probably take the same deal if I could get enough of a principle reduction to make it worth hurting my credit. For me that would have to be a heck of a lot more than $39,000, no offense. I would want at least $100k, probably more.Right now I am hoping to do a true refinance of the entire balance of my first mortgage which is a $472K jumbo interest only, under the terms of the National Mortgage Settlement. BofA customer service has told me I qualify for this. If I'm able to reduce my interest rate from 6.375% to 4.375% (for example, given current jumbo rates from BofA website), while keeping my credit score in tact, I will be very happy.

[Jimbo35]

Thanks for your thoughts.I knew my credit would take a hit by doing this, but after 6 months my credit score is back to 696, which I don't think is horrible (or maybe it is? I wouldn't really know, I've never dealt with credit issues before). What I'm surprised about is that there are apparently rules and guidelines in place that keep anybody from refinancing a house that has had a loan mod done, even if the LTV is at a (somewhat) reasonable 90%. My loan officer has been telling me for a while now about some great 90% LTV loan programs he has available (including one with no PMI), if only I could get my 1st balance down below the conventional limit. So I thought, ok great, I'll jump on this FHA short refi and then in another year or so when my credit has recovered I'll refi into a conventional. I guess not....I still come out financially ahead, because if you calculate the total PMI I'd pay until my loan balance gets to 78%, it still comes out quite a bit less than the total interest savings I'll enjoy over that same timespan compared to my old loan.Sounds like the mortgage settlement is a good way to go with you, but last summer this short refi was the only solution I could see on the horizon. And it's not bad, just not ideal. Now I'm left pondering whether to go all-in with my credit hit and try and settle my 2nd. I was going to hold off on dealing with my 2nd until I could refi into a new first, but if I'm going to be twiddling my thumbs for the next 3 years I'm thinking of taking another hit and stop paying my 2nd and see if they'll settle. Not sure if I'm ready to make that jump, but I'm thinking about it.Thanks again for your thoughts.

[mpaterso]

Jim

Thanks for the update. It is great that your fico is still almost 700! There is plenty of advice on this board about how to settle a 2nd lien. Trouble is it can take years and you'll need nerves of steel. But the fact is your 2nd lien holder has zero leverage if that loan is out of the money. Also I'm sure you'd take an additional fico hit, not sure how much. But right now at 696, you're still in the "good" range I believe.

[Jimbo35]

Another update about a year later. Wait, check that, almost exactly a year later. Wow.

When last we talked, I was trying to get out of this stupid $400/mo FHA PMI by doing another refinance, but ran into troubles because my short refi was being interpreted as a modified loan, and refinances of modified loans can't be done for at least several years.

After my last update, I continued working with a couple mortgage brokers to no avail, and then didn't do much. But towards the end of last year, I noticed that the market around here seemed to be picking up, and prices seemed to be rebounding a bit. 1.5 years earlier, my home was appraised at $464k, but based on a couple of the popular home value websites plus my own neighborhood observations, I thought my value might have rebounded to the $500k-$520k range, which means that I might actually have had a tiny sliver of equity with my total 1st+2nd loan balance totalling $495k.

I decided to pick up my refinance efforts again, but after striking out with mortgage brokers, I looked at other avenues and noticed on my credit union's website that they market their use of "portfolio loans", ie loans that they keep and don't sell. So I stopped by and talked to somebody, and was surprised to find that they actually offer a portfolio loan that's 95% LTV with no PMI. However, the catch is that they only offer these in the form of 5/1 ARMs (not surprising considering that a local credit union wouldn't want to tie up their money for 30 years at a fixed rate).

The other catch is that these are for conventional limits, however my loan person offered to talk to her manager, and based on my credit and history they agreed to offer me a jumbo portfolio loan at market jumbo loan rates, which at the time was around 3.8% (a little higher than the 3.25-3.5% conventional rates that were prevalent during the fall of 2012). The one downside is that this wouldn't be a fixed rate, but the payment relief this would offer me, even in the short term, was simply too good to pass up.

The only question mark was the appraisal. If the appraisal came in at $525k, I was golden. Anything less, and I'd need to bring cash to closing. The appraisal came back at $500k even. So my 95% loan amount was $475k, which meant that I needed to pay down my $495k loan balance plus closing costs. After factoring in my savings, I ended up getting a $22k loan from my 401(k) that costs me almost exactly $500/month for 4 years. Even with that, though, my monthly payment is still way lower than my old 1st + 2nd payments.

In the end, this is what I ended up with:

Old loans:
1st: $3193/mo for PITI+PMI at 4.75%
2nd: $595/mo for PI at 7.825%

New loans:
1st: $2,211/mo for PI w/no PMI at 3.79% (I'm back to paying taxes/insurance myself, which I much prefer).
401(k) loan: $500/mo for 4 years at 4.25%

If I factor in taxes/insurance which would be ~$650/mo if I paid it monthly, I'm looking at a total monthly outgo of $3,361 which is down from the $3,788 that I was paying before. And that will reduce another $500/mo in 4 years. In practical cashflow terms, since I'm paying taxes/insurance all at once out of my burst-y income, my monthly budget has an extra $1,000/mo which is awesome.

Of course, I'm not done yet. My rate will go variable in 5 years, and I don't intend that to happen. So one more refinance is likely in my future. If I punch my loan into an amortization calculator, I see that after 4.5 years my loan amount will be ~430,000, which is within spitting distance of the $417k conforming limit. So I will likely have one more paydown in my future, which I can start saving for well in advance. Then I'll be shopping around for just a conforming 1st mortgage at hopefully less than 80% LTV. The interest rate environment will probably be worse than now, but that's ok. I should still come out ahead in the end.

If this thread is still around, I'll stop by in another 5 years to finish the story of my journey from an interest-only 1st at 6+% and a 2nd at 7+% that was $80k underwater, to a low-interest 1st that has ~20% equity. All it takes to get there is some paydown from the note holder, some paydown from myself, and time. Oh well, whatever works...

Yay for keeping Wall Street out of the picture!!!

[Cat Damiano]

That is great that you were able to eliminate the PMI. Congratulations on achieving the second refi to accomplish this.

[Erik Sandstrom]

Congratulations on avoiding PMI and completing the refinance through a portfolio product. Many banks offer certain programs like that, for example we have a portfolio product that piggy backs the 1st mortgage up to 90% to avoid MI. Both of the loans have great interest rates and the reason we have the partnership to do this is because of the performance of our loans in which we service.

I'm still confused about this FHA Short Refinance program to be completely honest, it sounds to me like all the people here end up with FHA Streamline Refinances which can in most cases still drastically benefit borrowers.

If you're looking for a lower MI and don't owe more than the home is worth, conventional is always a great option regardless because of the MI removal requirements. The MI also is lower than FHA (in 99 percent of cases) and is based typically on your FICO and current LTV.

How to remove Mortgage Insurance on a conventional loan?
1. Loan balance reaches 75-78 percent of the appraised value at the time of refinance.
2. Obtain an appraisal (through the company you are refinancing with) that shows you have 20 percent equity. This will most likely come before you get to the option above due to the home values now starting to increase in most areas.

I tend to focus on niche products and do have a few out of the ordinary programs if you wouldn't qualify conventional but you still must have a small amount of equity and an overall strong borrower profile.