President Obama has announced new guidelines to make it cheaper
and easier for homeowners to refinance FHA mortgages. So what does
it mean for you and how do you know if you qualify for it?
Streamlined refinancing
The new rules apply to FHA Streamlined refinancing, which is
about as close to automatic as refinancing a mortgage can get. You
don't need an appraisal, you don't need proof of income, you don't
need a credit check, you don't even need to be employed. Basically,
all you need to do is be current on your mortgage and made all your
payments on time over the past year.
The catch is that you can only qualify for an FHA Streamline
Refinance if you already have an FHA mortgage. The reason is pretty
simple - since the FHA already backs your mortgage, they're the
ones who are on the hook if you default. So if refinancing will
help make your mortgage more affordable for you, it's all good to
them.
Reduced costs
The changes announced today significantly reduce the fees
usually charged for FHA mortgages and refinancing. The upfront fee
of 1 percent of the loan amount currently charged on FHA home loans
is being reduced to a mere 0.01% - equal to $10 on a $100,000
mortgage - while the annual insurance premium is being cut by more
than half, to 0.55 percent of the balance, down from 1.15 percent
currently.
The administration estimates the reduced annual fee will save an
additional $95 a month on a $175,000 mortgage, on top of any
savings from refinancing to a lower mortgage rate.
The reduced fees only apply to borrowers who took out their
current FHA mortgage prior to June 1, 2009. The new figures will
remain unchanged when the fees for other FHA mortgages increase to
1.75 percent up front and 1.25 percent annually as of April 1,
2012.
Help for underwater borrowers
Because a streamline refinance doesn't require an appraisal of
the home's current value, homeowners can be underwater on their FHA
mortgage (i.e., owing more than their home is worth) and still
qualify for refinancing. In fact, there's no limit on how far
underwater a borrower can be and still get an FHA Streamline
Refinance.
If you're underwater due to a non-FHA second mortgage on top of
your FHA home loan - for example, a home equity loan or home equity
line of credit (HELOC) - you'll need to pay off the balance on that
loan before you can get an FHA streamlined refinance. You won't be
able to fold it into the new FHA mortgage. Theoretically, you might
be able to get the second mortgage resubordinated to the new FHA
loan, but that process is pretty much incompatible with a
streamline refinance.
Still the lender's call
Although the FHA has pretty generous guidelines for refinancing
its own loans, it's still the lender's call on whether to refinance
or not. Lenders will have their own fees for refinancing any loan,
which will vary from lender to lender, and some may even refuse to
refinance a mortgage even if it meets FHA requirements.
The new guidelines remove some of the obstacles that sometimes
make lenders reluctant to do an FHA streamline refinance, by taking
such loans out of the formula used to assess their performance as
FHA-approved lenders. Since many of these mortgages are considered
somewhat riskier than more recent home loans, some lenders have
been reluctant to refinance them for fear of damaging their rating
with FHA, even though FHA is assuming the financial risk
itself.
To see if you can obtain an FHA mortgage refinance, check with
your FHA mortgage lender.