Get Out the Checkbook or Why You Should Not Wait to Refinance Your FHA Mortgage

by Alex Stenback on September 29, 2009

About ten days ago, FHA Commisioner David H. Stevens announced that the FHA would, for the first time, fail to maintain it’s required level of cash reserves due to rising default rates. 

Regular readers may know where this is headed: As default rates rise, so do the hurdles one must clear to get a home loan.

Predictably, the FHA recently announced a bevy of rules changes that will make certain types of FHA insured home loans tougher to get.  Especially impacted is a product called a Streamline Refinance.

In the current ultra-low rate environment, Streamline Refinances have been a boon to those fortunate enough to have an FHA mortgage, enabling a a reduction in rate without subjecting themselves to a new appraisal (more often than not a deal killer in a market where home values have declined 17% in the last year alone) and other documentation requirements.

In very real terms, with an FHA streamline refinance, so long as you made your mortgage payment on time, you could refinance with no appraisal, and almost no questions asked, and even include closing costs in the new loan. 

But on Nov 18th, 2009, things are going to change.

After that date, to be eligible for a Streamline Refinance:

  • You must have had your FHA insured mortgage for at least six months, and never made a payment 30 or more days late
  • Can only have one payment more than 30 days late in the past 12 months, be current, and made all mortgage payments within the month due for the past three months.
  • You cannot include closing costs in the new loan, unless a new appraisal is obtained.
  • You must be employed and have verifiable income.
  • Document any assets you will use to pay closing costs.

Of the list above, the fact that closing costs cannot be included in the new loan is the one that will give would-be refinancers the most heartburn. 

For perspective, in Minnesota, the average out of pocket cost for an FHA refinance on a $200,000 home loan is something like $5K, depending on how the loan is structured. No mean sum, and unless one wants to risk an appraisal that may prevent a refinance entirely, after Nov 18th, these costs must be paid in cash, at closing.

Now, in theory, those costs will be recouped over the long haul by lowering your rate (otherwise, you should not refinance in the first place, right?)

Still, that is a big check for any family to write in the middle of a recession.  Most people would rather keep that cash on hand than spend it to save $195 bucks per month, no matter how much savings-over-time comes out the bottom of a spreadsheet.

So, if you have an FHA Mortgage, you plan to be in the home for the medium to long term, and your rate is anything north of 6%, you should be in touch with your banker and get while the getting is good.
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By the way, if you haven’t heard from your banker since closing, drop me a line, I’ll run the numbers for you.

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