Chances are that if you own a home and used FHA financing to buy your home, you have gotten a ridiculous amount of mail about the FHA Streamline Refinance program. If you're like me, those solicitations probably go straight into the recycling bin. The Streamline is an FHA loan program that has been in place for a long time, it is designed to help current FHA loan holders reduce their interest rate and payment without having to go through the regular loan qualifying process. This means that as long as you have been paying your mortgage on time for 12 months, your credit score is not terrible (over 600), and you can prove that you have a job (or other income stream) you will be able to qualify for the loan. There is no appraisal for the Streamline so even if you owe more than your home is worth you can still qualify for the loan. The program also does not ask you to provide income documentation. The underwriter will verify that you are employed but they are not going to look at how much money you make as there is no Debt to Income (DTI) requirement like there would be on a regular loan.
With FHA rates now sitting in the mid to high 3% range you would think that everyone with an FHA loan would be taking advantage of this program right? Well as is usually the case, there is one little hitch. All FHA loans have mortgage insurance, or PMI. Over the past two years the FHA has increased the cost for that mortgage insurance multiple times to a level now where the cost is more than double what it was just two years ago. So even if you were able to reduce your interest rate from 5.0% to 4.0%, you still would not be saving much money due to the increased mortgage insurance. Even if you wanted to refinance and save $50 per month the FHA has a minimum benefit guideline which would not allow the loan to go through for such little savings.
So now you know the story, the FHA created this great loan then jacked up their cost so much that it was not practical for most people. Well, as the title of this post states, there is a major change that went into effect Monday, June 11th. If you currently have an FHA loan, and you have had that loan since May 31, 2009 or longer you can use the Streamline program without the cost of your mortgage insurance increasing. On top of that, FHA is setting interest rates in a way that the borrower does not see their loan amount increase, and they are not required to come out of pocket with any funds to close the loan.
Here's an example: John bought his home in April of 2009 using a $300,000 FHA loan at 5.0% interest. His total payment with taxes, insurance and PMI was $2,097. After paying the loan for 3 years his balance is now $285,000. His new loan after using the Streamline refinance will still have a balance of $285,000. With an interest rate of 3.75% his new total payment will be $1,799 per month saving him $297 each month. On top of that he will get to skip one payment and after his loan closes his current lender will be sending him back the money he has in his current escrow account that is used to pay his taxes and insurance. In John's case that would be about $2,000. *Disclaimer: Interest rates and programs are subject to daily change due to the market, credit score and other factors*
So what do you think? Too good to be true? That is what I have heard from the last two people I spoke to about this program but there is in fact a really good reason why the FHA is doing this. FHA provides the mortgage insurance on these loans. If an FHA homeowner is foreclosed on, the FHA is responsible for paying the lender for any losses on that foreclosure. Regardless of what you may have read, property values have not really fallen that much over the past two years. Sure in some areas they have but on a national scale property values have pretty much been sitting in the same range since 2010. That is not really the case for people who bought their homes in 2009 or prior. Those homeowners have seen their property value fall significantly and as a result nearly all of them owe more money on their mortgage than their home is worth, they are underwater. Even though the FHA has not said so publicly, they have reduced their mortgage insurance as an incentive to make sure that these people who are underwater don't simply walk away from their home.
Please don't hesitate to comment or ask questions below. Of course, if you have an FHA loan that you have been in for three or more years let me know and I'll be happy to help you.
*Annual Percentage Rate (APR) for above example is 5.207%