Thinking about refinancing an FHA loan, using that oh-so-easy FHA Streamline Refinance? Better act fast.

Thinking about refinancing an FHA loan, using that oh-so-easy FHA Streamline Refinance? Better act fast.

As of Jan. 1, the FHA is making some major changes to the highly popular Streamline Refinance and may of them won't be in the borrower's favor. In fact, they'll make qualifying for the loan significantly more difficult.

Up until now, an FHA Streamline Refinance has been one of the easiest refinances going. As long as you already held an FHA mortgage, you could almost automatically refinance it, with almost no limitations or restrictions in regard to credit rating or employment status. In essence, since you already had an FHA loan, the FHA was happy to allow you to refinance it at market rates, regardless of your current financial status or market value of your home.

Tighter rules after Jan. 1

The new rules though, are not nearly so forgiving. Currently, the FHA does not require proof of employment to refinance an FHA loan; after Jan. 1, borrowers will have to furnish proof of income. Borrowers will also have to order a new appraisal if they want to "roll" closing costs into the new mortgage, rather than simply relying on the original appraisal done when they first purchased the home. Unlike before, they'll also have to provide proof of any assets they intend to use for a down payment.

The new rules are intended to help the FHA limit its exposure to mortgage liabilities, which have become an increasing problem with the downturn in the economy and rising foreclosure rates. But after Jan. 1, some homeowners who would qualify for a streamline refinance under current rules would be turned down for insufficient income, assets or property value.

Homeowners thinking about an FHA refinance should therefore act now, rather than risk losing their eligibility, unless they are confident they will still be able to qualify after the first of the year. Even so, given today's unusually low mortgage interest rates, it is unlikely they will be able to obtain better terms down the road than are available currently.

Some pro-consumer rules

Some of the new FHA rules do benefit consumers. Among them is a requirement that a borrower realize a net benefit through refinancing, which should reduce or eliminate the problem of unscrupulous lenders selling refinance that actually cost the borrower more in the long run. The new rules require that borrowers obtain a lower interest rate, monthly payment or other demonstrable benefit through an FHA refinance.

For homeowners who are refinancing out of an adjustable rate mortage (ARM), the new rules require that the rate on the new, fixed-rate mortgage be no more than 2 percentage points higher than the current rate on the one-year ARM. For hybrid ARMs, the rules specify the new monthly payments can be no more than 20 percent higher than the current payments.

To qualify for refinancing, the value of both the primary and any secondary mortgages may not exceed 125 percent of the current property value. To verify eligibility, it is recommended that borrowers check with an FHA-approved lender for further advice.

Published on September 24, 2009