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FHA refis get easier, cheaper

By Polyana da Costa ·
Tuesday, March 6, 2012
Posted: 4 pm ET

The government has made it easier and cheaper for borrowers who have a Federal Housing Administration mortgage to refinance their loans at lower rates through the FHA streamline refinance program.

About two million to three million borrowers will be eligible to refinance through the program, according to estimates by the administration.

President Barack Obama said Tuesday that the FHA is cutting FHA fees by more than half for borrowers who refinance through the streamline program.

A borrower refinancing a mortgage of about $175,000 would save more than $1,000 a year with the lower fees. That's in addition to the savings resulting from the lower interest rate the borrower grabs through the refinance. That means a borrower who refinances $175,000 at 4 percent interest would pay about $915 per month, compared to about $1,010 per month under the higher fees.

Here are the specific numbers: The FHA currently charges an upfront mortgage insurance premium of 1 percent of the borrower’s loan balance and an additional 1.15 percent of the balance per year. Those who refinance through the FHA streamline program will pay 0.01 percent of the loan upfront and 0.55 percent in annual mortgage fee.

OK, enough with the numbers. This announcement may sound like another unsuccessful government attempt to allow borrowers to lower their monthly mortgage payments and stay in their homes -- or just pure politics. But I'll tell you why I believe these changes may actually help borrowers this time. (FYI: I'm usually very skeptical about these efforts. Some would say I'm pessimistic.)

Under an FHA streamline refinance, borrowers are required to provide minimum documentation to the lender, even if they owe more on their mortgages than their houses are worth. Lenders don’t have to get an appraisal of the house, check credit or verify income as long as the mortgage already is insured by the Federal Housing Administration. The FHA has allowed streamline refinances since the early 1980s. But since the housing bubble burst, lenders have ignored the streamline guidelines for the most part and imposed their own, stricter, requirements on borrowers, making streamline refis useless.

That's expected to change. In short, lenders should become more willing to refinance the loans because the FHA is changing the way it grades lenders. The FHA has a score system in which it keeps track of the performance of FHA loans by lender. If a particular lender has too many bad loans, when compared to other FHA lenders, the FHA may choose to stop doing business with that lender. Lenders fear if they refinance too many risky loans, they will hurt their FHA scores. Loans refinanced through an FHA streamline program will be no longer be included in the score.

To qualify for an FHA streamline refi:

  • You must be current on the mortgage.
  • The mortgage must already be insured by the FHA.
  • Your mortgage must have closed before June 2009.

The cutoff date was somewhat disappointing as it excludes thousands of borrowers. Shaun Donovan, secretary of the Department of Housing and Urban Development, says the program changes were designed to be aligned with the HARP program. He says homeowners who borrowed prior to 2009, when interest rates were higher, are those who would benefit the most from refinancing.

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March 14, 2012 at 6:30 pm

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March 07, 2012 at 11:48 am

Adam -

The new rates go into effect on June 11, 2012. However, only on loans insured by FHA prior to June 1, 2009. In short, if you closed prior to 6/1/09, you are eligible. If after 6/1/09, you are not.

March 07, 2012 at 11:44 am

The reduced rate is great. HOWEVER, I am in the process of a streamlined refi and although it sounds good, there is no guarantee that 30 year mortgage rates will stay down. Any thoughts?

Adam Gerstein
March 07, 2012 at 10:11 am

When do these low rates for streamlines go into effect? Thanks for your help,
Adam Gerstein