June 11 was the first day of FHA’s huge Upfront Mortgage Insurance Premium and Monthly Insurance rate decrease for many FHA streamline refinance transactions. This article is intended to help you determine if you or someone you know may qualify to take advantage of the new insurance premiums and in turn, today’s low rates on a FHA refinance. Please note that the information given is straight from FHA’s guidelines (minus some of the technical jargin) and the lender that you choose to use may have additional overlays in their underwriting practices.
How do I know if I would qualify for an FHA streamline refinance?
- You must hold a current FHA-insured mortgage; and
- You must have made at least six payments on the FHA-insured loan that you want to refinance, and
- There must be at least a 5 percent reduction to the Principal and Interest payment of the mortgage plus the annual Mortgage Insurance Premium or
- The refinance needs to be from an adjustable rate mortgage (ARM) to a fixed rate mortgage (15 year or 30 year)
Do I need an appraisal for a “Streamline refinance?"
Technically you do not need to get an appraisal done for a streamline refinance. That is if FHA shows a sufficient value in the “FHA Connection” system AND you are not trying to roll your closing costs into the loan amount. This is where I am seeing a number of lenders add some overlay conditions to the loan. Most lenders are asking for at least an “Automated Valuation Model” (or AVM), which is just a fancy way of saying a computer generated appraisal based on public record sales in the area. If you are in a more rural area, these AVM’s have been known to be far less accurate. If an appraisal is used and shows sufficient equity (if the new base loan amount is under 96.5 percent of the appraised value), and you qualify credit wise, than closing costs can usually be added into the loan amount. NOTE: If you do not need to roll closing costs into the loan amount, you can go to 97.75 percent.
What if I have paid my mortgage on time but have been slow paying other items?
One of the biggest benefits of a streamline refinance is that it allows individuals that might not otherwise qualify to refinance the ability to refinance with much less credit documentation than a standard refinance transaction. If you have a good mortgage payment history but have made other late payments on accounts, you may still qualify for a non-credit qualifying streamline. As long as you have been current on your mortgage for the last 12 months, there is some wiggle room for other delinquent obligations. These other delinquencies may have been caused by a pay cut or temporary layoff or if you have taken on additional medical expenses, you may be able to benefit from a non-credit qualifying streamline because debt-to-income ratios are not required. If you're using the most recent value indicated in the FHA Connection system, and your new loan amount does not exceed 97.75 percent of the value, a non-credit qualifying streamline may accomplish your goals. Adjusting your new rate a little higher will allow your new lender to pay your closing costs for you since non-credit qualifying will not allow those costs to be rolled into the new loan amount.
Can I do an FHA Streamline refinance on my rental property?
The short answer is yes, but only for streamlines without an appraisal.
What sort of documentation would I need to supply for a Credit Qualifying Streamline Refinance?
Unfortunately, these types of loans require almost all of the same documentation that any other FHA loan would require. That means you need 30 days of paystubs, two years W2s for wage earners, two years tax returns for self-employed borrowers. You would also need to gather two months bank statements to document assets if needed for closing.
This does not really sound too streamlined here…
If I need all that documentation in order to roll my closing costs into the refinance, why wouldn’t I just do a regular FHA refinance? What would be the benefit of a streamline?
That’s a great question to ask. Really, the ONLY benefit of a credit-qualifying streamline versus a standard refinance is that the combined loan-to-value allows for up to 125 percent of the new appraised value or 125 percent of the existing “FHA case value”, depending on whether you choose to streamline with or without an appraisal. If you qualify for a standard FHA refinance at the maximum 97.75 percent combined loan-to-value and don’t need the expanded Combined Loan To Value of up to 125 percent to cover a second mortgage, than it may be better to do the standard FHA refi. In fact the standard refinance allows the potential benefit of Automated Underwriting which could provide approval for expanded debt to income ratios.
What are the “Up-front” and “Annual” Mortgage Insurance Premium rates for an FHA Streamline Refinance?
Ahh, this is where things get a bit tricky. I will start this off by saying that as a rule of thumb, if you got/closed your FHA loan prior to March 30, 2009, this is most likely a great deal for you right now. The reason I say that is that the new “Roll Back” insurance premiums are only for those loans that were endorsed by FHA on or before May 31, 2009 and it can take as long as 60 days from the time of closing till FHA actually endorses the loan (sometimes less, sometimes more). If you are close, just give me a call, and I can find out for you. Now with that being said, check out the attached chart.
As always, if you have any questions, please feel free to contact me directly via email or phone.