One of the Federal Housing Administration’s first responses to the crisis of underwater borrowers was to create the 125 Percent Refinance Program. Aimed at underwater homeowners, it allowed people who owed at least 105 percent of their home’s value on an FHA loan to refinance and receive FHA mortgage insurance for their balance. The loan program was capped, though, at no more than 125 percent of their home’s value, similar to programs that both Fannie Mae and Freddie Mac were offering. While this program was a good first start, it failed to help as many homeowners as some had hoped.
The FHA 125% Refinance Program had three key problems. The first was that it had relatively stringent credit requirements, meaning that many of the homeowners who needed it the most could not take advantage of it. The second is that its narrow LTV band prevented many homeowners from taking advantage of it. People who owed between 97 and 104.9 percent of their home’s value owed too much to use a traditional FHA Streamline but too little to take out a 125% Program loan. At the same time, those who owed more than 125 percent of their home’s value, not an uncommon event when they bought their homes with only three percent down under FHA mortgages, also could not take advantage of the program. The third problem was that the FHA’s 125 ltv mortgage refinance program was complicated. It involved modifying the first mortgage and creating a second mortgage which did not come into play until the first mortgage was paid off. All of these factors combined to limit the number of homeowners that were able to using the program to refinance their loans to a lower rate.
A Better Way
The FHA’s streamline mortgage refinancing program which, in one form or another, had been around since the 1980’s provides a much better alternative. Streamlines are refinance loans that do not have to do through the same extensive paperwork and processing as a new loan. The FHA has only two key requirements for streamlining a current FHA loan. First, the transaction must either lower a borrower’s payment or convert them from an adjustable rate to a fixed rate. Second, it cannot have a larger balance than the loan that it replaces.
Streamline Eligibility Requirements
The most aggressive variant of the FHA streamline program became available in March of 2012. If your original FHA streamline loan was taken out on or before May 31, 2009, you should be able to qualify for the program. What makes this loan so special, and such a good alternative to the FHA 125% program, is its relaxed underwriting requirements. As long as you have been current for the past 12 months and can save at least 5 percent by refinancing, you can qualify for a refi with no income verification, no employment verification, no credit check and no physical appraisal. In other words, your home’s value does not matter since the FHA will not look at it. Furthermore, the FHA has even discounted their insurance fees, making it even cheaper for you to get a loan. As with other streamlines, you can either pay your closing costs in cash or have a no closing cost loan where you pay a slightly higher interest rate and have the lender pay the costs. Given that mortgage interest is tax deductible, refinancing this way is a great deal.
As long as you have been current on your FHA mortgage for the last 12 months, this streamline program is a much better deal than the 125 ltv refinance program. It is easier to apply for, simpler to understand and has no caps on how much you can borrow relative to your home’s value. It even includes reduced closing costs thanks to the discounts on FHA insurance.
When Not to Streamline
While streamlining will save you a great deal of money compared to an older mortgage, it fails to address the other problem of an underwater house. You will still owe more money than your home is worth. If you think of your home as an investment, this is a problem and a loan modification that reduces your principal may be a better option. Modifying your loan and reducing your balance, if your bank will let you, will not only save you money but could also get your house “back in the money” so that it becomes a sounder investment and a contributor to your net worth. That being said, if you look at your house primarily as a place to live, you could find that it becomes cheaper to stay in your house after streamlining your FHA mortgage than to rent an equivalent house. In addition, you will not have to move.
The revised FHA streamline program is an excellent opportunity for current homeowners to get out from under old, high-rate debt. Since lenders can add their own requirements to their FHA streamline refinances, you might need to shop around a bit to find one that will offer you terms as liberal as the FHA allows. With the amount of money that you can save, though, your effort will be richly rewarded.