Another Lending change that will affect many homeowners

by Tom Tousignant

in Blog, Mortgages, Refinancing

If you happen to have an FHA loan on your home, an important benefit that you have is about to be taken away.  FHA loans currently have an option of a ‘Streamline Refinance’, which is a great way to lower your interest expense with very little hassle, paperwork or uncertainty.

This month, the FHA announced changes to the streamline refinance program that will take away this option for a lot of FHA mortgage holders.  Currently, the Streamline refinance doesn’t require the borrower to verify their income, assets, employment, or even to get/pay for an appraisal. The news rules require:

  1. 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.
  2. 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.
  3. 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.
  4. 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. For most people, they will need to get the appraisal done to cover the expenses of the loan and have to pay for the cost of the appraisal as well.
  5. 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 rule that makes sense. 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.

These new rules go into effect for all FHA streamline refinances that are registered with the FHA after November 17th, so anyone who could benefit from a refinance program now, will need to have their lender register the refinance with the FHA prior to that date.

Do you currently have an FHA loan at a rate of 6.0% or higher?  If so, you would likely benefit from a streamline refinance before the new rules go into effect.  A streamline refinance does not have to be with the lender that currently has your mortgage.  Since service levels, rates and costs can vary among lenders, you can call the 800 number to your current lender, but you may find you are better served working with a local mortgage professional that you know or a friend can refer you to.

In the long run, eliminating a loan program that allowed someone to refinance without showing their ability to pay the loan (Income and Employment), sounds like a good idea.  The other half of this argument is that the homeowner is already making their mortgage payments on time, but now they can’t refinance to a lower rate because forces beyond their control, such as the appraised value or a job loss.

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