With mortgage interest rates plummeting to record levels, and home sales plummeting as well, many people have a renewed interest in refinancing for lower interest rates and sometimes shorter mortgage terms.

The FHA streamline refinance is a great option for quite a few of them. Here are the rules which are currently in effect since January 1, 2009 for calculating FHA streamline refinances.

In order to qualify for an FHA streamline refinance you must be a homeowner who currently has an FHA-insured mortgage. 

An FHA streamline refinance does not require any proof of income or any verification of funds to close. No repairs are required unless the house has lead paint. FHA does not require a credit report, but most lenders require one for loan pricing purposes and have new overlaying guidelines not allowing for streamline refinances if you have a score below 620. FHA guidelines require only a verification of the mortgage payment history for the last 12 months (or the length of time the mortgage has been held). HUD’s Credit Alert Interactive Voice Response System (CAIVRS) need not be checked, but a check of HUD’s Limited Denial of Participation (LDP) and General Services Administration (GSA) exclusion lists is still required for all borrowers.

FHA does not require a termite inspection letter for streamline refinances, however lenders are allowed to require one and some do. No mortgage credit underwriting is required. Individuals may be added to the property title without verification of credit worthiness. If any borrower is removed from the title and loan the remaining borrower must go through the full credit qualifying process unless the property was transferred without triggering the due on sale clause due to a divorce decree or inheritance more than 6 months ago and the borrower can prove (canceled checks) that they have been making the payments themselves.

At closing the borrower can receive no more than $500 or the loan must be sent back to the underwriter. This makes it extremely important for the loan originator/processor to verify all attorney/title fees, payoffs and lender fees prior to underwriting.

If there is a second mortgage or equity line, it may be subordinated (legally placed in second position again in spite of a new first mortgage) without regard for the total loan to value. Keep in mind that many second lien holders today are surprisingly difficult to negotiate with.

There are two types of streamline refinance - with an appraisal or without an appraisal. Several different factors will affect which version you choose.

If you purchased your home less than 12 months prior to applying for the refinance, no appraiser in his right mind is going to appraise it for much more than the purchase price in today’s market. Thus if you have reason to believe that the appraised value will be lower than your original sales price, then you would obviously try, if possible, to use the no appraisal FHA streamline refinance. Sometimes this is difficult unless there was a substantial down payment made at the time of purchase. HUD has made a nice accommodation in this area. If the appraisal has been done, but the value is such that it makes more sense for the borrower to proceed as if no appraisal has been done, the underwriter is allowed to ignore the appraisal.

For streamline refinances without an appraisal, the maximum loan amount is the lower of:

• The original principal balance including the FHA upfront mortgage insurance premium from the original closing. (This can be obtained from the Refinance Authorization screen in the FHA Connection) minus any refund from the original upfront mortgage insurance premium, plus the new upfront mortgage insurance premium (1.5%) or

• The total of the principal balance on the existing first lien plus up to one month of the monthly mortgage insurance premium plus the mortgage payment (PITI) that was due on the first of the month of closing (if not already paid), plus up to 30 days interest for the current month, plus any late charges or escrow shortages, plus borrower-paid closing costs plus prepaid expenses (per diem interest to end of month on new loan plus hazard insurance deposits plus real estate tax deposits plus reasonable discount points), minus the upfront MIP refund (if applicable) plus the new upfront mortgage insurance premium (1.5% of the base loan amount).

The mortgage insurance refund for all loans originated after December 8, 2004 is only paid when refinancing to another FHA loan and not when any FHA loan is paid off as it used to be. The following chart shows the percentage of the original upfront mortgage insurance which will be refunded:

MIP Refund Chart

For an FHA streamline refinance with an appraisal, – with NO credit qualifying, the maximum loan amount will be the lower of the two calculations below:

• The total of the principal balance on the existing first mortgage plus up to one month monthly MIP plus the mortgage payment (PITI) that was due on the first of the month of closing (if not already paid), plus up to 30 days interest for the current month, plus any late charges or escrow shortages, plus borrower-paid closing costs plus prepaid expenses (per diem interest to the end of the month on the new loan plus hazard insurance deposits plus real estate tax deposits plus reasonable discount points), minus the upfront MIP refund (if applicable) plus the new upfront mortgage insurance premium (1.5% of the base loan amount).
• Multiply the appraised value of the property by 97.75%

Note: This article has been revised due to HUD guideline changes. The Housing and Economic Recovery Act of 2008 eliminated the variable loan to value requirements that had been in place for different states and also limited the amount of the mortgage plus upfront mortgage insurance payment to 100% of the appraised value. In Mortgagee Letter 2008-23, HUD originally used this 100% of appraised value standard and eliminated the 97.75% loan to value limitation. However, to simplify things Mortgagee Letter 2008-40 changed the standard back to 97.75% of the appraised value. A matrix outlining the new FHA refinance requirements is available here.

If you have questions about streamline refinancing which are specific to your own loan such as interest rates, whether refinancing is worth it, or closing cost questions, please contact me directly by clicking the link or by calling me at 727-488-7355.