The FHA Streamline Refinance program has helped many borrowers lower their interest rates and housing payments. FHA has long held the view that decreasing a borrower’s monthly payment should be a good thing and very easy to accomplish as long as the borrower has been making their payments on time. After all, if the borrower is already making the payments and FHA has already insured the mortgage either way, then why be picky about the details. Thus, the FHA streamline refinance process has always been an easy one.

Unfortunately, as we hear so commonly in the mortgage business today, the times are changing. In response to today’s economic climate and increasing defaults on FHA, FHA streamline refinance requirements were tightened considerably at the beginning of 2010.

Here are the highlights of the primary changes:

1. FHA borrowers must now be employed at the time of application
2. Any cash needed to close must be fully verified
3. If the borrower needs to “roll in” any closing costs at all to their loan amount, then the lender must have a full appraisal done
4. Borrowers must now have made at least 6 payments on their loan before refinancing
5. There must be a specifically allowed net tangible benefit to the borrower.

Keep in mind that lenders are also allowed to tighten up these guidelines even further, and many have. An FHA streamline refinance is still only insured by FHA. FHA is not the lender. So before you commit to an FHA streamline refinance, be sure to obtain quotes from different lenders and realize that the guidelines may be different for different lenders.

Following are the exact details of all the changes:

Revisions for ALL Streamline Refinance Transactions

Seasoning: At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.

Payment History: At the time of loan application, the borrower must exhibit an acceptable payment history.  For mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due. For mortgages with a 12 months payment history or greater, the borrower must have experienced no more than one 30 day late payment in the preceding 12 months, AND made all mortgage payments within the month due for the three months prior to the date of loan application.

Net Tangible Benefit: The lender must determine that there is a net tangible benefit as a result of the streamline refinance transaction, with or without an appraisal.  Net tangible benefit is defined as:  a) reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens), b) refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage, OR c) reducing the term of the mortgage.

Reduction in Total Mortgage Payment:  The new total mortgage payment is 5 percent lower than the total mortgage payment for the mortgage being refinanced.  Example:  Total mortgage payment on the existing FHA-insured mortgage is $895; the total mortgage payment for the new FHA-insured mortgage must be $850 or less.

This requirement is applicable when refinancing from a Fixed Rate to Fixed Rate, from an ARM to ARM, from a Graduated Payment Mortgage (GPM) to Fixed Rate, from GPM to ARM, from a 203(k) to 203(b) and from a 235 to 203(b).

Fixed Rate to ARM:  Fixed rate mortgages may be refinanced to a one-year ARM provided that the interest rate on the new mortgage is at least 2 percentage points below the interest rate of the current mortgage.

ARM to Fixed Rate:  The interest rate on the new fixed rate mortgage will be no greater than 2 percentage points above the current rate of the one-year ARM.  For hybrid ARMs, the total mortgage payment on the new fixed rate mortgage may not increase by more than 20 percent .  Example:  total mortgage payment on the hybrid ARM is $895; the total mortgage payment for the new fixed rate mortgage must be $1,074 or less.

Reduction in Term:   For transactions that include a reduction in the mortgage term, that loan must be underwritten and closed as a rate and term (no cash-out) refinance transaction.

Investment Properties/Secondary Residences:  In addition to meeting the requirement for a reduction in the total mortgage payment, investment properties or secondary residences are not eligible for streamline refinancing to ARMs.

Certifications and Verifications: When submitting the loan for insurance endorsement, the lender must include a signed and dated cover letter on their letterhead certifying  that the borrower is employed and has income at the time of loan application. If assets are needed to close, the lender must verify and document those assets. The lenders must also include the pay-off statement in the case binder.

Credit  Score: If a credit score is available, the lender must enter the credit score into FHA Connection.  If more than one credit score is available, lenders must enter all available credit scores.

Maximum Combined Loan to Value: If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent. For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property. For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.

TOTAL Scorecard: Lenders should not use TOTAL on streamline refinance transactions.  However, lenders may score streamline refinances through TOTAL and still process and underwrite the loan as a streamline refinance transaction if doing so is in the borrowers’ best interest.

Uniform Residential Loan Application (URLA): Mortgagees may no longer use an abbreviated version of the URLA.  The application for mortgage insurance must be signed and dated by the borrower(s) before the loan is underwritten.  Mortgagees are permitted to process and underwrite the loan after the borrowers and interviewer complete the initial URLA and initial form HUD-92900A, HUD/VA Addendum to Uniform Residential Loan Application.

Revised Streamline Refinance Transactions WITHOUT an Appraisal

The maximum insurable mortgage cannot exceed: The outstanding principal balance  minus the applicable refund of the Upfront Mortgage Insurance Premium, PLUS The new UFMIP that will be charged on the refinance.

Revised Streamline Transaction WITH an Appraisal

The maximum insurable mortgage is the lower of: 1) The outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and the new UFMIP that will be charge on the refinance; OR 2) 97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance. Discount points may not be included in the new mortgage.  If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.

Unchanged Streamline Refinance Rules

The following on streamline refinance transactions remains unchanged:

• Maximum mortgage limits and maximum mortgage term
• Streamline Refinances for investors/secondary residences
• Cash back at closing
• Permissible geographic areas
• Appraisals
• HUD LDP and GSA exclusion lists
• Credit Reports
• Credit Qualifying [except maximum insurable mortgage]
• Holding period for assumed loans
• Adding/Deleting Borrowers
• Withdrawn Condominium Approval
• Seven Unit Limitation
• No Cost Refinances
• 203(k) to 203(b) [completion of rehabilitation]
• 235 to 203(b) [overpaid subsidy and junior liens]

This site is primarily focused on providing information for originators of FHA loans, but this post should be useful to both loan originators/processors and consumers. With mortgage interest rates plummeting to record levels, and home sales plummeting as well, many people have a renewed interest in refinancing for lower interest rates and sometimes shorter mortgage terms.

The FHA streamline refinance is a great option for quite a few of them. Here are the rules which will be in effect beginning January 1, 2009 for calculating FHA streamline refinances.

In order to qualify for an FHA streamline refinance you must be a homeowner who currently has an FHA-insured mortgage. Streamline refinances for conventional mortgages are in the planning stages, but have not been implemented yet.

An FHA streamline refinance does not require any proof of income or any verification of funds to close. No repairs are required unless the house has lead paint. FHA does not require a credit report, but some lenders may require one for loan pricing purposes. FHA guidelines require only a verification of the mortgage payment history for the last 12 months (or the length of time the mortgage has been held). HUD’s Credit Alert Interactive Voice Response System (CAIVRS) need not be checked, but a check of HUD’s Limited Denial of Participation (LDP) and General Services Administration (GSA) exclusion lists is still required for all borrowers.

FHA does not require a termite inspection letter for streamline refinances, however lenders are allowed to require one and some do. No mortgage credit underwriting is required. Individuals may be added to the property title without verification of credit worthiness. If any borrower is removed from the title and loan the remaining borrower must go through the full credit qualifying process unless the property was transferred without triggering the due on sale clause due to a divorce decree or inheritance more than 6 months ago and the borrower can prove (canceled checks) that they have been making the payments themselves.

At closing the borrower can receive no more than $500 or the loan must be sent back to the underwriter. This makes it extremely important for the loan originator/processor to verify all attorney/title fees, payoffs and lender fees prior to underwriting.

If there is a second mortgage or equity line, it may be subordinated (legally placed in second position again in spite of a new first mortgage) without regard for the total loan to value. Keep in mind that many second lien holders today are surprisingly difficult to negotiate with.

There are two types of streamline refinance – with an appraisal or without an appraisal. Several different factors will affect which version you choose.

If you purchased your home less than 12 months prior to applying for the refinance, no appraiser in his right mind is going to appraise it for much more than the purchase price in today’s market. Thus if you have reason to believe that the appraised value will be lower than your original sales price, then you would obviously try, if possible, to use the no appraisal FHA streamline refinance. Sometimes this is difficult unless there was a substantial down payment made at the time of purchase. HUD has made a nice accommodation in this area. If the appraisal has been done, but the value is such that it makes more sense for the borrower to proceed as if no appraisal has been done, the underwriter is allowed to ignore the appraisal.

For streamline refinances without an appraisal, the maximum loan amount is the lower of:

• The original principal balance including the FHA upfront mortgage insurance premium from the original closing. (This can be obtained from the Refinance Authorization screen in the FHA Connection) minus any refund from the original upfront mortgage insurance premium, plus the new upfront mortgage insurance premium (1.5%) or

• The total of the principal balance on the existing first lien plus up to one month of the monthly mortgage insurance premium plus the mortgage payment (PITI) that was due on the first of the month of closing (if not already paid), plus up to 30 days interest for the current month, plus any late charges or escrow shortages, plus borrower-paid closing costs plus prepaid expenses (per diem interest to end of month on new loan plus hazard insurance deposits plus real estate tax deposits plus reasonable discount points), minus the upfront MIP refund (if applicable) plus the new upfront mortgage insurance premium (1.5% of the base loan amount).

The mortgage insurance refund for all loans originated after December 8, 2004 is only paid when refinancing to another FHA loan and not when any FHA loan is paid off as it used to be. The following chart shows the percentage of the original upfront mortgage insurance which will be refunded:

FHA Upfront Mortgage Insurance Refund Chart

For an FHA streamline refinance with an appraisal, – with NO credit qualifying, the maximum loan amount will be the lower of the two calculations below:

• The total of the principal balance on the existing first mortgage plus up to one month monthly MIP plus the mortgage payment (PITI) that was due on the first of the month of closing (if not already paid), plus up to 30 days interest for the current month, plus any late charges or escrow shortages, plus borrower-paid closing costs plus prepaid expenses (per diem interest to the end of the month on the new loan plus hazard insurance deposits plus real estate tax deposits plus reasonable discount points), minus the upfront MIP refund (if applicable) plus the new upfront mortgage insurance premium (1.5% of the base loan amount).
• Multiply the appraised value of the property by 97.75%

Note: This article has been revised due to HUD guideline changes. The Housing and Economic Recovery Act of 2008 eliminated the variable loan to value requirements that had been in place for different states and also limited the amount of the mortgage plus upfront mortgage insurance payment to 100% of the appraised value. In Mortgagee Letter 2008-23, HUD originally used this 100% of appraised value standard and eliminated the 97.75% loan to value limitation. However, to simplify things Mortgagee Letter 2008-40 changed the standard back to 97.75% of the appraised value. A matrix outlining the new FHA refinance requirements is available here.

CONSUMERS: If you have questions about streamline refinancing which are specific to your own loan such as interest rates, whether refinancing is worth it, closing cost questions, Please DON”T leave the question in the comment section. I may not see it for a while. Use the contact form below or the Contact link at the top of the page.