The FHA Streamline refinance is one of the easiest and most beneficial loans available. This program lets borrowers who are have an existing FHA loan refinance into a lower rate mortgage without having to get a new appraisal or prove their income. The idea behind the program is that these borrowers have already qualified for the loan, and if they could afford the higher payment, they would be in better shape with a lower rate and a lower payment. The FHA streamline refinance or FHA refinance loan has always been a good program, but in this market, with home values down and appraisals a consistent problem, it has been a God send for many, allowing some borrowers to save up to hundreds of dollars each month. But FHA has come under pressure as a result of all the problems in the housing market, so they are making moves to cut their risk and save money. This means that as of loans assigned case numbers after November 17th, the FHA Streamline refinance as we know it will be gone.
Here are the changes coming in November:
- Verification of income and cash to close – These are the two biggest changes. The streamline is considered a streamlined refinance because you don’t have to go through the normal mortgage approval process where everything is verified. The new regulations will require a letter from the lender stating that they have verified that the borrower has enough income to qualify and has sufficient cash to pay for the closing costs and escrows needed to close the loan.
- Seasoning – borrowers will need to have paid 6 payments on their loan before they can refinance. In most cases this won’t make a difference, but in times when the interest rates have dropped sharply, like earlier this year, the borrowers couldn’t take advantage of the lower rate and lower payment unless they already had 6 payments under their belt.
- Payment history – As it stands now, all the FHA streamline requires is that the mortgage is paid up to date and current. The new regulations require that mortgages with less than a 12 months of payment history have made all mortgage payments within the month due (no late payments). For mortgages older than one year, the borrower can’t have more than one late payment in the last 12 months, and none in the last three months.
- Net tangible benefit for the borrower – This means that the mortgage lender has to show that the borrower is benefitting from the refinance by getting either a lower payment, reducing the time he will pay on the mortgage or converting from an ARM into a fixed rate mortgage. This only makes sense and has been put in as a consumer protection because too many loans have been made where the borrower is lowering their interest rate, but because of all the upfront charges, they aren’t getting any real benefit from doing it (the mortgage broker is, though). This is already the law in Illinois.
- Maximum combined loan to value – As the program is set up now, FHA will let you subordinate your second mortgage or home equity loan (keep it in place with the banks permission), no matter how much the combined value of the 2 loans is compared to your home’s value. With this change they are now capping it at 125%, or the loans can’t be over 25% more than what your home is worth. In the real world this won’t make much of a difference. Most second mortgage lenders don’t want to offer subordinations over the home’s current value anyway, and even if FHA allows it, the lender funding the mortgage may not.
- Appraisal guidelines – One of the big advantages of the FHA streamline refinance, especially in this market, is that the borrower can in most cases roll the closing costs and escrow charges into the new loan amount, reducing the cash they need to come up with at closing. The new rules will require that if you want to roll in costs, you will need a new appraisal. If property values are down, as is the case for many borrowers, they will need to come up with the cash upfront and show that they have the funds available.
- Discount points – After the changes take place, borrowers won’t be able to roll discount points into the new loan to buy down the rate. This is another rule that makes sense to me. I’ve seen too many companies that prey on borrowers by offering below market rates, but then piling on the points (which increases the loan amount and the payment) in order to get the lower rate. This rarely makes sense for the borrower, even if they will stay in the loan for the full 30 years.
Here is a breakdown of how the FHA Streamline Refinance Program works now. If this loan will work for you, do it now, time is running out.
The FHA streamlined refinance is only available for borrowers who currently have an FHA mortgage (if you don’t, you can still refinance into an FHA mortgage, but it will be a fully documented mortgage). Because FHA is a government program, and its mission is to increase home ownership, they have designed this program as a way to make it easier for borrowers who are already paying their mortgage on time to lower their payments without going through the entire qualifying process.
There are two types of FHA streamlined refinance, one where you can add in all your closing costs and pre-paids, but it requires a new appraisal to show you have enough equity to support the new loan amount. The other is an FHA streamlined refinance with no appraisal. This program does not require a new appraisal (which makes a difference if your property value has gone down). You can still add closing costs and escrows into the new mortgage amount, but your new mortgage is capped at the amount of your initial loan.
Here are some of the features of the Current FHA streamline refinance:
- No credit qualifying. This is not credit score based and it is not even necessary to pull a full credit report. Your mortgage does need to be up to date, and current and we will look at your payment history over the last 12 months.
- No income qualifying. When we take a streamlined application, we don’t even look at your employment, income or debts. The logic behind this is that if you are able to handle your mortgage payments and other debt now, you will not have any trouble when the payment is lowered.
- FHA mortgage refinance Loan. The mortgage needs to be an FHA loan, and it has to already be insured by FHA (If the lender who made the loan hasn’t gotten the loan insured yet, you will have to wait until it is in their system).
- You can’t receive any cash at the closing.
- In order for the loan to be approved, you will need to show that this loan is helping your situation. This means a reduction in your payment by at least $50 per month.
- The actual closing costs on these loans are low, the FHA commitment fee and title charges are the only costs needed. With most of the streamlines I have done, we have paid these costs through the premium we receive from the lender, so the borrower isn’t paying it directly.
- With FHA there is always an up-front mortgage insurance fee that needs to be paid. Depending on when you bought the home, you may get a refund of a portion of the fee you paid initially. This works on a sliding scale. You will get a large portion of the fee back in the first year, but it is all gone by the end of the third year. If you get a refund it will be applied against the new fee, with the balance financed into the new loan amount.
- One other thing to keep in mind is that you want to close your loan as near the end of the month as possible. FHA, unlike conventional mortgages, charges interest on their payoffs on a monthly basis, not per day. So you will pay the same amount of interest if you close on the first day as you would on the last day. You still have to allow for the 3 day right of rescission, and in a market like this getting a title spot and closing within your lock term is more important.
FHA used to be a major loan option, but it all but disappeared for a number of years as all sorts of low down payment plans came out on the conventional side. With conventional loans tightening, FHA made a resurgence last year. This means that older loans will likely be eligible for streamlines with the appraisal, but most of the newer loans will be doing the loan without the appraisal. Even if there are no closing costs involved, when you close on a loan you will need to set up a new escrow account and pay interest to the end of the month. Some of this will be able to be added in to the new loan amount, but without an appraisal you are capped at the original loan amount. Keep in mind that you will skip your next month’s payment and get the money in your escrow account back from your current lender in the next several weeks after closing, so it will be a wash in the long run, but if you bought with the minimum down payment you will probably need some cash at closing.
The FHA streamlined refinance is a great deal for most borrowers, and a quick and easy way to take advantage of the low rates we can now offer.