Today, many borrowers have a desire to refinance their mortgages to take advantage of historic low mortgage interest rates
. However, over 11 million Americans have experienced a decline in their home values below what they owe on their loans. The S& P/Case -Shiller Home Prices Index reports that the value of the average home declined 34 percent since the housing market reached its top nearly six years ago.
Almost in lock step with the decline in home values, the percentage of mortgages guaranteed by the Federal Housing Agency (FHA) have increased from just two percent of total mortgages in 2006 to over 18 percent in 2011.
Like many of their fellow homeowners with privately held mortgages or loans guaranteed by Fannie Mae and Freddie Mac, borrowers with FHA-insured mortgages have found it nearly impossible to participate in the FHA’s Streamline Refinance Program because they have “underwater” mortgages.
About the FHA Streamline Refinance Program
The FHA’s Streamline Refinance Program has been around since the 1980s. The agency structured the program for homeowners who financed the purchase of their homes with FHA guaranteed mortgages. Briefly, the streamline refinance program refers to reduce documentation requirements and less stringent underwriting criteria mortgage lenders undertake to process applications.
HUD estimates that as many as 750,000 homeowners have taken advantage of the FHA streamline refinance program. According to HUD, 50 percent of borrowers refinanced their mortgage after the dramatic collapse of the real estate market in 2009.
Many Homeowners Made Ineligible with 2010 Program Revisions
As strange as it may seem, HUD made two modifications to the streamline refinance program in 2010. The changes to the program made it difficult for many borrowers to refinance their mortgages.
Beginning on October 2010, capped the Combined-Loan-to-Value (CLTV) to 125 percent for its streamline refinances. Borrowers with underwater mortgages and homeowners with more than one loan on their homes would have to bring cash to the closing table to pay off obligations and reduce their debt ratios to qualify for the program.
In addition, HUD/FHA increased fees for mortgage insurance in an effort to boost the FHA Mutual Mortgage Insurance Fund reserves. Higher rates for mortgage insurance made refinancing from high interest rate loans into lower interest rate mortgages tough for borrowers with high loan-to-value-ratios (LTVs) —over 125 percent.
Reduced Fees for Streamline Refinance Program
Starting on June 11, 2012, the Federal Housing Agency, revised fees for the streamline refinance program goes into effect. The difference for financially struggling homeowners can be astounding.
For example, under the old fee schedule, a borrower with a $250,000 mortgage would pay $4,375 for Upfront Mortgage Insurance Premium or 1.75 percent of the mortgage amount. Under the fee revisions, borrowers only pay 0.01 percent, or in this example, $25. The annual cost of mortgage insurance drops from $260 to $115 per month.
The main attributes of FHA’s Streamline Refinance Program consists of reduced documentation and relax underwriting requirements for loan applicants.
Homeowners determined eligible to refinance under the program gain the following advantages:
- Lower monthly payments for the complete terms of the loans
- No credit checks
- No income verifications required
- No Appraisals require on properties
- Apply over the phone or online
Since the streamline refinance loan does not require an appraisal (in most cases), the loan-to-value ratio does not come into play in the underwriting process. The LTV cap was one of the main impediments to borrowers refinancing to low interest rate loans under the Home Affordable Refinance Program (HARP), which the Federal Housing Finance Agency revised a few months ago. The HARP revisions included the elimination of the 125% LTV limit for mortgages insured by Fannie Mae.
Streamline Refinance Loan Eligibility Requirements
Generally, owner-occupants and certain secondary residences, which meet specific HUD criteria, can qualify for FHA’s streamline refinance program. FHA does allow some non-profit entities and governmental agencies to apply for streamline refinancing. Nonetheless, most applicants live in eligible homes as their primary residences.
Homeowners wishing to qualify for a streamline refinance must already have an FHA-insured mortgage. In addition, the rules require the following conditions:
The basic requirements homeowners must meet include:
- Homeowner must be current with mortgage payment and no late payments in the last 12 months
- The refinance must lower the borrower’s principal and interest or move the borrower from an adjustable-rate mortgage into a fixed-rate mortgage
- Borrower cannot receive cash-back from the transaction
The FHA streamline refinance program only applies to borrowers who have mortgages insured by FHA prior to June 2009.
Borrowers with FHA-insured mortgage who have an interested in the streamline refinance program need to discuss their circumstances with their respective lenders. In some cases, borrowers may require an appraisal or the lender rules will necessitate borrowers to meet other conditions, such as the ability to repay the loan.
Requirements for eligible credit scores also vary from lender to lender. In addition, lenders must adhere to state requirements. Although HUD rules for the program do not require lenders to verify borrowers’ income and ability to repay, state statutes may require lenders to document this information.