Homeowners with a Federal Housing Administration (FHA) loan who have not refinanced their mortgages in the last two years or so may be able to reduce their monthly mortgage payments with an FHA refinance. That's because the interest rates on FHA mortgages are hovering near the lowest in history, and the FHA recently cut the insurance premiums on its mandatory annual mortgage insurance. Today's low interest rates and the FHA's insurance premium may make refinancing your FHA loan a deal.
In early 2015, the FHA cut its mortgage insurance premium rate to 0.85 percent — a half-point decrease. That might not seem like much, but if you have a $200,000 loan, this seemingly small amount adds up to $900 per year. This new mortgage insurance rate is not retroactive, which means if you have an FHA loan with the older, higher rate, you must refinance to save money.
This calculator can help you figure how long it would take to break even on an FHA mortgage refinance.
If you are thinking about a refinance, remember the closing costs, which may make or break your decision. Start by asking yourself how long you intend to own the home. The shorter your calendar, the less sense refinancing makes. Your existing rate is important, too.
FHA Streamline Refinance
One of the most popular FHA refinance options is the FHA Streamline. This refinance lets borrowers reduce the interest rate on FHA loans with fewer steps than what is required in a traditional refinance. An FHA Streamline refinance normally doesn't require an appraisal or credit score check, which saves you time and money. It also makes refinancing possible if your property's value declined, you have a low credit score, or you would otherwise not qualify to refinance with another loan type.
Lenders like FHA Streamline loans because their simple applications cut down on the pile of paperwork they must process.
Requirements to Qualify for an FHA Streamline Refinance
No 30-day late payments in the last three months. Only one 30-day late payment is accepted in the last 12 months. All debt obligations must be current at closing.
Borrowers must make at least six payments on the loan and 210 days must pass since the original loan closed.
The combination of principal, interest and mortgage insurance must be reduced by at least 5 percent from the existing loan. A borrower could also qualify if switching from an adjustable-rate mortgage (ARM) to a fixed-rate loan.
Loan balance cannot increase, so closing costs must be paid at closing or credited by the lender.
The FHA Streamline refinance might be a good solution to borrowers who may not have enough equity in their homes to gain approval for a refinance. This makes Streamline refinances popular with homeowners who are stuck in underwater mortgages, meaning they owe more than the house is worth.
Requalification is not required. No credit check takes place. The FHA allows borrowers to use the home's original purchase price as the home's current value, regardless of what it is worth at the time of the refinance transaction.
Borrowers can use an FHA Streamline to refinance to a loan with a lower interest rate, or change their loan term, or both. To exchange equity in their home for cash, a homeowner wanting an FHA Streamline loan must get an appraisal.
Closing costs cannot be rolled into FHA Streamline refinances where an appraisal is not completed. The refinance only covers principal, balance and the upfront mortgage insurance payment. The FHA will not allow an increase in the loan balance that is the result of loan charges. If an appraisal is done, then closing costs can be rolled in.
It's easier to get an FHA refinance without an appraisal if the borrower's goal is solely to lower interest rates and monthly payments. But not all Streamline refinances can skip the appraisal.
The FHA requires an appraisal if the borrower wants to apply for an FHA cash-out Streamline refinance. If the homeowner has maintained an FHA loan for at least one year, the existing mortgage can be refinanced for up to 85 percent of the appraised value, plus allowable closing costs. The 85-percent ceiling means the property must be appraised to assess its market value.
When Is Requalification Required?
Unlike a standard FHA Streamline, a cash-out refinance requires a new borrower to requalify. That means the lender will review your income, employment status and credit score. Other variables can complicate a Streamline refinance. If the loan is changing from an adjustable rate to a fixed rate and the new payment is higher, the lender requires an appraisal.
What if the Monthly Payment Increases, We Drop a Co-Signer, or Assume a Loan?
When the payment goes up in an FHA Streamline, the borrower is subject to credit, employment and income reviews. These verifications also come into play if one of the borrowers is removed from the original mortgage, or if the borrower assumes the mortgage without credit qualifications within the prior six months. A loan assumption means a new borrower took over the loan from the current borrower.
How Can I Use My Cashed-Out Equity?
An FHA Streamline is not just for saving money or cashing out equity. You can use a Streamline to rehabilitate a home. If this is your goal, you can ask about an FHA Streamline 203(k) rehab loan. Rehabilitation loans allow you to finance up to $35,000 to complete minor repairs or upgrades to your property. Moreover, the new, refinanced mortgage balance can exceed the home's market value.
FHA Streamline Refinance Fees
The fees on FHA Streamline refinances are less other refinance loans, partly because of the limited verification process.
Interest rates vary from lender to lender. Some lenders charge a half point more for Streamline refinances than they do for a regular refinance. They don't add it to the interest rate, but include it as a fee. They do this because they are wary that no appraisal is being done. Shop around and ask lenders about this fee, as many lenders recently stopped charging extra for FHA Streamline loans.
FHA BY THE NUMBERS
refinances in 2014*
Mortgage Insurance on FHA Streamline Refinances
The FHA split Streamline refinances into two categories, based on whether the original FHA note was endorsed before or after June 1, 2009.
FHA loans prior to June 1, 2009:
These loans have grandfathered insurance premiums. The new mortgage's upfront mortgage insurance is only 0.01 percent of the loan. The MIP is or 0.55 percent of the total of the loan.
FHA loans after June 1, 2009:
The upfront mortgage insurance payment is 1.75 percent of the total of the loan. The annual mortgage insurance premium (MIP) is 0.85 percent for borrowers who have less than 5 percent of equity, or a loan-to-value above 95 percent.
This table illustrates the mortgage insurance fees on a $200,000 Streamline refinance for a loan issued prior to 2009 and one issued afterward.
|When the existing FHA loan was endorsed||Upfront mortgage insurance||Monthly mortgage insurance|
Prior to June 2009
After June 2009
Homeowners who got their loans less than three years ago can receive partial credit on the upfront mortgage insurance they paid on the first loan when they refinance with an FHA Streamline. The credit depreciates on a monthly basis.
You must pay other standard mortgage fees when refinancing an FHA loan, including lender origination charges, title fees, and other fees related to processing, researching and memorializing the transaction. You must pay local government fees to record the deed of trust or mortgage, and that varies from county to county.
What If You Are Turned Down for an FHA Streamline Refinance?
Don't give up if a lender rejects your application for an FHA Streamline refinance. Some lenders add conditions — called overlays — that the FHA does not require. Overlays are not consistent from lender to lender. A "no" from one lender could mean a hearty "yes" from another.
Shop around! Compare the interest rate and the closing costs. Purchasing points can bring down the rate and closing costs can be massaged.
Consider asking about lender credit. This is where the lender gives credit to the borrower to offset closing costs.
Refinancing from an FHA Loan to a Conventional Loan
FHA borrowers should periodically reexamine their mortgage terms. Compare them to current rates and reassess your current economic health. Look at your situation to see if you have changes to your credit score, credit history, income and debt.
About 80 percent of FHA loans go to first-time buyers, according to Ellie Mae, a mortgage software developer. The reasons borrowers go with an FHA loan vary, but it can be any combination of being newbies to the housing market and having a low credit score or a high debt-to-income ratio.
Over time, combinations of factors can put a borrower in a more advantageous position and make it possible to switch to a conventional loan. Ultimately, as a homeowner's credit and net worth improve, switching to a conventional loan should be the goal. Think of it as becoming a mature borrower.
Conventional loans come with lower interest rates and low-cost or no mortgage insurance premium. It is easier to get out of an FHA loan with a good rate if your credit score is high, and you have some equity in the home. What is the ideal credit score to refinance an FHA loan into a conventional loan? Lenders say a good benchmark to rely on is a 740 FICO score. Borrowers with credit scores of 720 to 739 should expect a slight adjustment on the interest rate. But at 740 and above, lenders can consider offering the best deals.
One of the main advantages of switching from an FHA to a conventional loan is being able to get rid of mortgage insurance. The FHA requires borrowers to pay for mortgage insurance for the life of the loan.
Should You Refinance Your FHA Loan into a Conventional Loan?
Is your FICO credit score above 680?
Do you have more than 5 percent equity in your home?
Is your DTI lower than 45 percent?
Do you have a stable job or can prove your income for the past two years?
You should probably consider refinancing out of an FHA loan.
Your chances of getting a refinance are higher with an FHA loan.
Your chances of getting a refinance are higher with an FHA loan. You can also consider refinancing with HARP.
you may have issues refinancing with a conventional loan.
FHA Refinance Questions and Answers
Michael Becker has more than a decade of experience in the lending business. A licensed loan originator and a manager of Sierra Pacific Mortgage in White Marsh, Maryland, Becker answers our questions about FHA refinances.
How hard is it to qualify for an FHA refinance?
Most lenders consider an FHA loan the easiest to obtain. When the subprime lending market crashed in 2007-2008, it was FHA that replaced lenders in that sector.
For example, the maximum debt-to-income ratio (DTI) allowed for a Fannie Mae loan is 45 percent. With FHA loans, lenders cap the DTI at 50 percent and some will go to 55 percent.
Debt-to-income ratios are considered within the context of other factors, particularly the credit score. Someone with a credit score of 650 might be leveraged up to 55 percent on their debt-to-income ratio and still be eligible for an FHA loan. But someone with a 580 credit score would need to have a considerably lower debt-to-income ratio.
The better question is how easy is it to qualify? For a straightforward FHA Streamline refinance (with no cash-out request), there is no requirement for employment verification, or income and credit score verification. There is usually no appraisal.
The borrower has to show a steady recent payment history. There has to be a perfect payment history over the last three months, and there can only be one late payment in the last 12 months. Loans also have to be current at the time of closing.
There are a few other requirements. There is a 210-day waiting period between refinances. The borrower must receive a tangible benefit in exchange for the loan. The FHA considers a tangible benefit as a reduction of the principal, interest and mortgage insurance of 5 percent or more. An alternative tangible benefit could be switching from an adjustable rate mortgage (ARM) to a fixed-rate loan.
What should the borrower know about the mortgage insurance premium in FHA refinances?
The mortgage insurance is for the life of the loan on all loans with a loan-to-value (total loan amount compared to the appraised value of the property) greater than 90 percent. That includes most FHA loans. The FHA used to let borrowers drop the insurance after five years if the loan balance had come down to at least 78 percent of the original amount. That practice ended in 2013, but if the loan-to-value (LTV) is equal to or less than 90 percent, mortgage insurance is charged until the end of the loan term, or 11 years, whichever comes first.
At closing, the borrower pays an upfront fee for the mortgage insurance premium. In addition, there is an annual payment split into 12 installments that gets paid with the mortgage each month.
What if you are turned down for an FHA refinance?
Consider getting a second, even a third opinion. Lenders can make mistakes and miss things that could have qualified the borrower. Some lenders are just more cautious than others, which is another way of saying the bank "overlays" conditions that the FHA does not require.
Also know that regular FHA refinances and purchases utilize Automated Underwriting Systems (AUS), but FHA Streamlines are manually underwritten.
So much of the loan review process in today's market is automated. Desktop Underwriter software is ubiquitous in the industry. If someone attempts to buy a home and they are declined because of AUS findings, then manual underwriting may help get that loan approved.
This may also require additional homework on the borrower's part. You may be asked to respond with a letter of explanation. This is where you get into the details of any financial question the lender has.
An example of this would be a bankruptcy. A Chapter 7 filing requires the discharge of all judgments, but with a Chapter 13 filing the FHA only requires that two years have passed since the filing date. Confusion over what type of filing and how long it has been since the filing is the sort of detail that can get messed up in an automated loan process.
How much confidence should the borrower put in an FHA refinance quote?
Not much, if you haven't shopped around. Mortgage refinancing is a very competitive business. Read up on current rates. Check with different borrowers. Also, remember the FHA requires a minimum reduction in the principal, interest payment and mortgage insurance of 5 percent or more.
If 5 percent is all your lender is offering, maybe there's a better deal out there. In the mortgage refinance industry, as a general rule of thumb, refinancing is considered to make financial sense if the borrower gets a break on the principal balance interest rate of at least 1 percent.
How long should it take to close on an FHA Streamline refinance?
It normally takes 30 days or less. However, this is a supply and demand business. The more favorable the terms become, the more demand and there are only so many loan officers. The process could take about 45 days in the event of a surge in FHA Streamline refinance applications.
When should a borrower refinance out of an FHA loan?
We touched briefly on this issue earlier, but there is a gray area. If the borrower's credit score is between 640 and 680, that is a strong indicator it might be time to look into a conventional loan.
Ask yourself basic questions about your finances and net worth. If your credit score is approaching 700, your mortgage loan balance is 60 percent or less of the house's value, and your debt-to-income ratio has substantially improved, then an FHA refinance may not make much sense, but a conventional refinance might be a great idea.
Run the numbers both ways — FHA and conventional — and see which is better for you.
*This interview was edited for clarity and space.