our everyday life

How to Qualify for New FHA Loans for Underwater Homeowners

by K.C. Hernandez, studioD

The Federal Housing Administration was created to help people buy homes with a low down payment or refinance with minimal equity. The FHA insures loans for approved lenders, reimbursing them if borrowers default. As a borrower who owes more on your home than it is currently worth, you may qualify to refinance into a better loan with the FHA. An FHA refinance for underwater borrowers, also known as a short refinance, helps you keep your home by making your monthly payment affordable and decreasing your mortgage burden so you can build equity.

Remain in your property if currently occupying it. To qualify for the short refinance, the FHA requires that borrowers use the home as their primary residence. This requirement entails moving back into the house if you currently rent the property out or have moved. Be prepared to wait out the short refinance process. It can take several weeks to several months due to the high volume of applications and its protocol, including appraisal, document review and investor approval.

Ensure that you meet the basic minimum requirements for the program by reviewing your financial and personal situation, including any criminal record. You must either be current on your mortgage payments or have made three on-time payments on a trial payment plan to qualify. Check your FICO credit score to ensure you have at least a 500 middle score among the three credit-reporting bureaus: Equifax, TransUnion and Experian. Be prepared for the lender to verify your income and employment status. The program allows you to spend a maximum of 55 percent of your gross income on the new housing payment and other monthly debts.

Contact your current lender or loan servicing company and ask if they participate in the FHA Short Refinance program. You can find its contact number on your mortgage statement. Your current lender's participation is voluntary. If you have more than one lender, both must agree to participate in order to refinance. The lender takes a loss on the loan by agreeing to write off, or forgive, the difference between 97.75 percent of your home's current appraised value and your current mortgage balance. The lender must agree to forgive at least 10 percent of the debt.

Find an FHA-approved lender to prescreen, or prequalify, for a short refinance. Lenders approved to make loans for the FHA include commercial banks, credit unions, savings and loans and direct mortgage-lending institutions. You may contact an FHA-approved mortgage broker, which works with several FHA wholesale lenders, visit your local banking branch office or ask your current lender if they offer FHA loans. A real estate agent may be able to refer you to an FHA lender. You can also find a lender in your area by using the Department of Housing and Urban Development's online database of approved lenders.

Send the lender a complete loan application and supporting documents for the underwriting review. Much like a home purchase or traditional refinance, the FHA lenders must ensure that you meet the short refinance guidelines, including a maximum debt-to-income ratio of 55 percent, an acceptable home appraisal and the lender's minimum credit score requirements. Supporting documents include recent pay stubs, bank statements, tax returns, corresponding W-2s and a signed letter stating the reasons you seek a short refinance.

Follow up on your loan application at least once per week to find out the file status. Provide any additional information requested by the lender to complete or clarify aspects of the file. It can take several months to gain approval for a short refinance and approval is not guaranteed.

Attend the loan closing at the escrow company chosen for the transaction or at a designated meeting place. You must sign the new mortgage agreement in front of a notary public and provide proper identification at this meeting. In some states, an attorney must be involved in all loan closings.


  • Using your current lender to refinance into an FHA loan still involves qualifying under FHA guidelines and incurring refinance costs, just as it would using an entirely new lender. Refinance closing costs are generally financed into the new loan and do not require you to pay out of pocket.
  • If you can't meet the 55 percent DTI requirement, your lender may suggest other options, such as a short sale, in which you sell the home at fair market value, or deed-in-lieu of foreclosure.


  • Only existing non-FHA loans qualify to refinance with the short refinance program.
  • The FHA has temporarily enhanced its short refinance program to help more borrowers during the housing crisis. These short refinance rules apply to loans with FHA case numbers assigned between September 7, 2010 and closed on or before December 31, 2014.
  • The short refinance usually affects your credit score because your current mortgage lender will likely report it to the credit bureaus as an account settled for less than the amount owed.

About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.

Photo Credits

  • Comstock/Comstock/Getty Images