Have an FHA Loan? It Might Make Sense to Refinance in 2012
Have you been waiting for the right time to refinance?
If you have an FHA loan, there hasn’t been a better time to take advantage of lower interest rates, and the government has lowered prices on mortgage insurance to help make it more affordable.
The FHA streamline refinance program has been around for years, but most people don’t realize that the Department of Housing and Urban Development is constantly tweaking the mortgage insurance premiums that are required on FHA loans. As a result of these changes, the FHA streamline guidelines have an impact on whether it makes sense to refinance — not just interest rates.
For years, HUD has required that each FHA borrower pay an up-front mortgage insurance premium as well as a monthly mortgage insurance premium (MIP), and finding the information about guideline changes on these requirements can be difficult.
Currently, the most important date to be aware of when thinking about an FHA streamline refinance is June 1, 2009. FHA loans that were endorsed (note: the endorsement date is usually a few weeks after your closing date) prior to June 1, 2009, now have different — and lower — mortgage insurance costs than FHA loans that were endorsed after that date.
MIP requirements for FHA streamline loans endorsed prior to June 1, 2009
Up-front MIP = 0.01 percent
Annual (paid monthly) MIP = 0.55 percent
MIP requirements for FHA streamline loans endorsed after June 1, 2009
If your FHA loan was endorsed after June 1, 2009, the MIP calculations can be somewhat confusing. MIP will vary based on loan-to-value ratio and the term of the loan.
- 15-year FHA loan, LTV over 90 percent: 0.60 percent
- 15-year FHA loan, LTV under 90 percent: 0.35 percent
- 15-year fixed-rate loan with LTV of 78 percent or less : no annual MIP
- 30-year FHA loan, LTV over 95 percent: 1.25 percent
- 30-year FHA loan, LTV under 95 percent: 1.20 percent
These are annual amounts and are paid monthly. So for a $100,000 loan with a 0.60 percent annual MIP, it would be 100,000 x .006 = 600 / 12 = $50 per month.
FHA streamline requirements in 2012
Net Tangible Benefit: Each FHA streamline has to pass the Net Tangible Benefit test, and most lenders use a worksheet to make sure the scenario “makes sense” for the borrower. One specific requirement is that the principal, interest and mortgage insurance portion of your new mortgage payment must go down by 5 percent or more. You would also be eligible if you’re refinancing from an adjustable-rate mortgage into a fixed-rate mortgage.
Loan balance can’t increase to cover closing costs without an appraisal: HUD doesn’t allow you to “roll the costs in” and increase your loan balance on the FHA streamline without an appraisal. The total amount of your new loan can’t be higher than your current principal balance plus the up-front mortgage insurance premium. The most common way for people to pay for closing costs is to be credited by the loan officer for their closing costs, but I have seen some people bring cash to closing as well.
Credit qualifying vs. non-credit qualifying: Some lenders will offer a different interest rate for people who can credit qualify and for people who opt for a non-credit qualifying FHA streamline. Be sure to ask your loan officer if the lender offers a difference in rate between the two.
Credit scores required (generally): Most lenders (although maybe not all) will require a minimum credit score on an FHA streamline. The most popular minimum credit score I see at lenders today seems to be 640, but be aware that some lenders may have a lower minimum credit score — or maybe even no credit score requirement at all.
FHA streamline for non-owner occupied homes: Many people have become “forced landlords” in the past few years and for whatever reason now have an FHA loan on a property they are currently renting out. The FHA streamline program can be done for these types of situations as long as the owner occupied the home for a least 12 months. When doing this kind of streamline, there is no appraisal option — meaning you can’t finance any of the closing costs except the up-front MIP.
Late payments: In order to be eligible for the FHA streamline program, most lenders will require that you have made the past 12 payments on your current FHA loan on time.
With the significant reductions in the mortgage insurance premiums for FHA loans endorsed prior to June 1, 2009, it makes sense that many more people are searching for a lender that can help them get a lower interest rate and save a significant amount on their mortgage payment. As with all mortgage programs, be sure to shop around for a good lender; you may be surprised to find not only differences in rates and fees, but also in expertise and service.
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Justin McHood is America’s Mortgage Commentator and lives in the Phoenix, Arizona area. You can find Justin on Facebook, Twitter, and LinkedIn. He is happy to answer any mortgage-related questions that you may have.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.