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A fast and easy refinance for those with an FHA mortgage

By Tom Reddin
Tom Reddin
Tom Reddin, former president of Charlotte-based LendingTree, writes an occasional column for Sunday Business about mortgages and home ownership. A version of this column previously appeared on his blog, MortgageRates.us. He runs Red Dog Ventures, a venture capital and advisory firm for early stage digital companies.

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A great refinance program is available for homeowners with an existing FHA mortgage. It’s from the Federal Housing Administration, and it’s called the FHA Streamline Refinance program. It’s a fast and simple way to refinance and take advantage of today’s record-low interest rates.

One of the biggest benefits of an FHA Streamline Refinance is that it does not require an appraisal, and allows you to use your original purchase price as the home valuation. Similar to the HARP program, which covers mortgages from Fannie Mae and Freddie Mac, it does not matter whether you are underwater on your mortgage.

In today’s housing market, where many regions have experienced massive drops in home values, this can be a lifesaver for homeowners who otherwise would not have enough equity in their homes to refinance their mortgages. Since no appraisal is required, there is essentially an unlimited loan-to-value ratio for these mortgages. This is an especially big help in the hardest-hit housing markets, such as California, Nevada, Arizona and Florida.

Verification and documentation requirements are also very light compared to the traditional mortgage requirements. With an FHA refinance, there is no employment verification and no income verification. While the FHA approves these lighter requirements, some individual lenders may decide to verify these items for their own purposes.

FHA Streamline Refinance also does not require a credit score verification. Instead, payment history is used as a guideline for your ability to pay the loan in the future. So, low FICO scores are not a problem as long as your payment history is in good shape.

The FHA Streamline Refinance program does require several things to get your loan approved:

• First, you’ll need a history of making payments on time over the past year, and at least six months must have passed since the closing date on your original FHA mortgage.

• Second, while there are no requirements for employment verification or income verification, you do need to provide copies of your W-2s or tax returns.

• Third, your loan balance cannot increase to cover closing costs. You can only add the upfront portion of the required mortgage insurance premium to the balance of your loan. So, the new loan balance can’t exceed the current amount outstanding, plus the upfront portion of the mortgage insurance premium. You’ll either have to pay the closing costs upfront in cash, or qualify with your lender for a zero-cost FHA Streamline refinance.

• Finally, the refinance must have a purpose that benefits the homeowner, such as significantly lowering the monthly mortgage payments, or moving from an adjustable-rate mortgage to a more stable fixed-rate mortgage. If lowering the monthly payment is the purpose, you must be able to demonstrate at least a 5 percent drop in your monthly mortgage payments, including the mortgage insurance premiums.

The FHA frequently updates these mortgage guidelines, and individual lenders may add their own specific requirements, so it’s best to check with your preferred lender to determine your exact situation. Also, if your original FHA mortgage was closed after May 31, 2009, the mortgage insurance premiums most likely will be significantly higher, so make sure to evaluate those costs carefully versus the savings you’ll receive from the lower interest rate.

You might ask why the FHA would be so lenient with these Streamline Refinances in today’s world of tighter lending standards? Well, the FHA is already on the hook by insuring each FHA loan, and borrowers will be less likely to default if they can refinance to lower monthly mortgage payments. Enabling borrowers to refinance to today’s super-low rates ultimately creates less exposure for the FHA’s insurance program.

Make sure to let your friends and family members know about this fast and easy solution in today’s market. The FHA Streamline program may not last forever, and it’s one of the few refinance options available today for people who may not be able to meet traditional lending requirements.

Tom Reddin, former president of Charlotte-based LendingTree, writes an occasional column for MoneyWise about mortgages and home ownership. A version of this column previously appeared on his blog, MortgageRates.us. He runs Red Dog Ventures, a venture capital and advisory firm for early stage digital companies.
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