President Obama has announced new guidelines to make it cheaper and easier for homeowners to refinance FHA mortgages. So what does it mean for you and how do you know if you qualify for it?
The new rules apply to FHA Streamlined refinancing, which is about as close to automatic as refinancing a mortgage can get. You don't need an appraisal, you don't need proof of income, you don't need a credit check, you don't even need to be employed. Basically, all you need to do is be current on your mortgage and made all your payments on time over the past year.
The catch is that you can only qualify for an FHA Streamline Refinance if you already have an FHA mortgage. The reason is pretty simple - since the FHA already backs your mortgage, they're the ones who are on the hook if you default. So if refinancing will help make your mortgage more affordable for you, it's all good to them.
The changes announced today significantly reduce the fees usually charged for FHA mortgages and refinancing. The upfront fee of 1 percent of the loan amount currently charged on FHA home loans is being reduced to a mere 0.01% - equal to $10 on a $100,000 mortgage - while the annual insurance premium is being cut by more than half, to 0.55 percent of the balance, down from 1.15 percent currently.
The administration estimates the reduced annual fee will save an additional $95 a month on a $175,000 mortgage, on top of any savings from refinancing to a lower mortgage rate.
The reduced fees only apply to borrowers who took out their current FHA mortgage prior to June 1, 2009. The new figures will remain unchanged when the fees for other FHA mortgages increase to 1.75 percent up front and 1.25 percent annually as of April 1, 2012.
Help for underwater borrowers
Because a streamline refinance doesn't require an appraisal of the home's current value, homeowners can be underwater on their FHA mortgage (i.e., owing more than their home is worth) and still qualify for refinancing. In fact, there's no limit on how far underwater a borrower can be and still get an FHA Streamline Refinance.
If you're underwater due to a non-FHA second mortgage on top of your FHA home loan - for example, a home equity loan or home equity line of credit (HELOC) - you'll need to pay off the balance on that loan before you can get an FHA streamlined refinance. You won't be able to fold it into the new FHA mortgage. Theoretically, you might be able to get the second mortgage resubordinated to the new FHA loan, but that process is pretty much incompatible with a streamline refinance.
Still the lender's call
Although the FHA has pretty generous guidelines for refinancing its own loans, it's still the lender's call on whether to refinance or not. Lenders will have their own fees for refinancing any loan, which will vary from lender to lender, and some may even refuse to refinance a mortgage even if it meets FHA requirements.
The new guidelines remove some of the obstacles that sometimes make lenders reluctant to do an FHA streamline refinance, by taking such loans out of the formula used to assess their performance as FHA-approved lenders. Since many of these mortgages are considered somewhat riskier than more recent home loans, some lenders have been reluctant to refinance them for fear of damaging their rating with FHA, even though FHA is assuming the financial risk itself.
To see if you can obtain an FHA mortgage refinance, check with your FHA mortgage lender.