What has been one of the easiest and most foolproof ways to refinance a mortgage is about to get a bit tougher. New rules for the FHA Streamline refinance take effect Nov. 17, meaning approval will no longer be practically guaranteed for borrowers with FHA mortgages.

Up until now, the process for an FHA Streamline Refinance has been basically like this: You apply. You're approved. As long as you already had an FHA mortgage and were making your payments on time, there were no requirements for income, assets, appraisals or credit checks, and no fixed limit on the loan-to-value ratio. But all that's about to change.

New documentation required

Under the new rules, you will have to verify your income and assets, and provide credit scores as well. You can still get by without an appraisal in some cases, although you will have to have one done if you're seeking to roll your closing costs into the new loan. And if you want to trim your interest rates by buying points, you'll need to pay for those separately.

Even so, the FHA Streamline is still pretty easy to obtain. The main requirement is still that you already have an FHA mortgage and have a good payment history. If you've had your mortgage less than a year, you need to have made all payments on time; if you've had it more than one year, you can have had one late payment in the past 12 months and still qualify. In any event, you need to have had the loan for at least six months before refinancing - that's a new requirement.

The new rules set a 97.5 percent loan-to-value limit if you're including closing costs in the loan - formerly, you could go over 100 percent to help cover closing costs. This could put a crimp in the hopes of many homeowners who are "underwater" on their mortgages and would like to refinance and take advantage of lower rates.

An option for "underwater" homeowners

However - and this is an important wrinkle - if you choose not to roll your closing costs into the new loan, you can still refinance based on your original appraisal! That means that, even though your house may have fallen in value, you can still refinance the remaining balance on your FHA mortgage to a lower rate as long as you pay the closing costs separately! While this can be a significant sum - closing costs are typically 2 percent of the loan balance or more - you'll make that up pretty quickly if you can knock your interest rate down a percentage point or two.

The FHA Streamline has other rules as well, which are unchanged from before. The refinance has to provide a "net tangible benefit, meaning it has to 1) reduce your monthly mortgage payment, 2) reduce the term of your mortgage or 3) enable you to refinance from an ARM to a fixed rate.

You cannot do a "cash out" refinance with an FHA Streamline; that is, you cannot use the mortgage to obtain funds for home repairs or improvements, or for other purposes. You can still do a cash-out refinance through the FHA, but it's a different process than the Streamline and has more requirements. You can refinance at up to 85 percent of the existing value of your home under an FHA cash-out refinance.

For more information, contact an FHA broker or lender, either directly or online.

Published on August 24, 2011