FHA Refinance for Borrowers with Negative Equity

by Gyani

Ask Kate about FHA Refinance for Borrowers with Negative Equity: Kate, Just found your site and thought you may have some helpful insights into my current situation! I'm in the process of refinancing my home with an FHA loan but have come to an impasse regarding a home equity line of credit I have with Bank of America.


Gyani continues...

Here is the situation. I have a private first mortgage of $520K and a second mortgage (the HELOC) with BofA for $120K, for a total of $640K owed.

Given the current value of the property it looks like the refi will cover about $580K - enough to pay off the first and about $60K of the BofA second.

FHA Refinance for Borrowers with Negative Equity
But since FHA doesn't allow for subordination, I'm trying to find a creative way of re-affirming the additional "unpaid" $60K with BofA.

I don't have the cash to pay this down so am attempting to have BofA convert the balance to an unsecured loan or credit line.

But I'm not getting anywhere with them.

Would you have any creative ideas about how to make this work?

Kate Answers: FHA Refinance for Borrowers with Negative Equity

***zz-portrait-left.shtml*** Hi Gyani,

In years past, I can remember helping homeowners attempt to negotiate similar situations with their lenders.

Plain and simple, lenders aren't too motivated to lift their lien, leaving themselves at risk even temporarily, so the homeowner can better their position.

This is a tough one. You sound like a perfect candidate for HARP 3.0 but of course, this is still in the proposal stage.

A loan modification plan like the FHA Home Affordable Modification Program came to mind but your first mortgage would need to currently be FHA insured.

FHA Short Refinance Option

However you could ask Bank of America (or your loan servicer) about the FHA Refinance for borrowers with negative equity, also called the FHA Short Refinance Option.

Although it may sound similar to the FHA streamline refinance, only homeowners without FHA financing can participate. Current mortgages also cannot be backed by USDA, Fannie Mae, and Freddie Mac, or VA guaranteed to be eligible for consideration.

What's so special about FHA Short Refinance? Drum roll... The amount you owe on your first mortgage will be reduced by your lender to no more than 97.75% of your home's current appraised value.

Not all lenders participate in the voluntary program and I'm questioning if this is a viable option for you since you described your first mortgage as private. However as I know homeowners sometimes interchange conventional with conforming or private, I'd like to be as thorough as possible in this information.

In addition to the type of current financing that cannot participate, you...

  1. Must owe more than the current appraised value of your home,

  2. Cannot be behind on your mortgage payments,

  3. Are living in the house as your primary residence,

  4. Will qualify under FHA loan guidelines,

  5. Have total debt that does not exceed 55% of your gross income, and

  6. Must not have been convicted of a felony in connection with a mortgage or real estate transaction within the last 10 years.
If you are interested in knowing more about FHA refinancing for borrowers with negative equity, please call the FHA National Servicing Center at (877) 622-8525 for more details. You can also contact HUD-approved Making Home Affordable Housing Experts at 888-995-HOPE (4673).

Both sources of help are free. I hope you will take advantage of their expertise.

Good luck and best wishes,


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