Put Your Client into a Better Loan Work less, make more money and put your client into a better loan! Yeah, right ? heard that before, haven?t you? What about no appraisal and no income qualifying? Too good to be true, right? Let?s test it out. All of the following are rumored to be features of the FHA Streamlined Refinance program. How would you answer? T F □ □ 1. Unemployed borrowers are eligible; there is no income qualifying □ □ 2. No FICO requirements □ □ 3. No new appraisal required, even in declining markets □ □ 4. Borrowers who no longer occupy the home may be dropped from the new loan □ □ 5. No asset verification □ □ 6. Loan can be done at no cost to the borrower □ □ 7. There is no one-year seasoning requirement □ □ 8. Borrowers end up with a better loan, usually with lower payments □ □ 9. Secondary financing may be subordinated without regard to CLTV □ □ 10. Current occupancy is not necessary You?re correct if you guessed that they are not all true; number 4 is false. But the rest are legitimate, and a fairly comprehensive synopsis of the FHA streamlined refinance features. Read through them again for a better appreciation of the program, skipping over #4 this time. There are two pretty big catches: (a) an FHA streamlined refi is only for borrowers who currently have an FHA insured mortgage; and (b) to originate an FHA mortgage, streamlined refinance included, you must be a W-2 employee of an FHA approved company. Pretty big catches. What Are Streamlined Refinances? The premise of streamlined refinances is to originate a new mortgage with minimum qualifications that place the borrower and HUD in a better position. Take Danny Homeowner, for instance, who purchased his home with an FHA insured mortgage. The FHA insurance means that HUD is already on the hook if Danny?s home were to be foreclosed (an unfortunately common occurrence lately). To mitigate this possibility, HUD is willing to insure a new streamlined refinance mortgage that makes it easier for Danny to make payments. So what if Danny lost his job or his home declined in value? Who Qualifies To qualify. FHA?s basic rule is that the P&I on the newly created mortgage must be less than the borrower?s current P&I payment. An exception to this rule allows increasing the current interest rate of an ARM loan by as much as 2% without additional qualifying other than ensuring that the borrower was making timely payments. There are other exceptions to a P&I reduction, most specifically for those going to or coming from ARM loans or reducing the loan term. Details can be located in HUD?s Handbook 4155.1 REV 5, Mortgagee Letter (ML) 04-28, and ML 05-43; or, in my own FHA and VA Streamline Refinance Handbook, found at my website. The bottom line is that it may not be just borrowers with high interest rates who are good candidates for a new FHA streamlined refinance. With or Without Appraisal Although FHA streamlined refinances may be performed with or without an appraisal, the typical reaction is, ?Why on earth order a new appraisal if it?s not required?? ?With? appraisal is not nearly as common as ?without?, but it does have an advantage. As you will see in the loan amount calculations, next, the maximum loan amounts for streamlined refinances without appraisals are limited by the original note amount (plus UFMIP). Calculations for ?with appraisal? are based on the new appraisal. In other words, if the value of the home increased since the first loan was originated, the maximum allowable loan amount is higher. Typically, Originators choose the ?without appraisal? route, and pay for cost shortages through their yield spread premium (YSP) or servicing release premium (SRP), resulting in a higher interest rate to the borrowers. The ?with appraisal? option is desirable if you?re trying to keep the rate low by increasing the loan amount to cover all of the new loan costs. How Much Can They Borrow? 1. The maximum loan amounts calculations are: ? Without an appraisal: the original note amount (which includes the UFMIP*) of the FHA insured mortgage being refinanced PLUS the entire new UFMIP. ? With an appraisal: 97.75% of the new FHA appraisal plus the new UFMIP (UFMIP is covered below) 2. But we?re not through. Because this is a rate & term and not a cash-out refinance, the clients may never borrow more than the mortgage indebtedness, which is: ? Existing Lien Calculation: Add the existing lien with no more than 60 days interest, new closing costs and prepaids, discount points as applicable to reduce the rate, costs of home repair if required by the appraiser; then subtract the UFMIP refund, if applicable; then add the new UFMIP The final loan amount is the lower of the two. If the ?existing lien? calculation is higher than the first calculation, the borrower will be short funds to close. The difference is the amount that must be derived through premium pricing (YSP or SRP) for a ?no cost? loan. Upfront MIP (UFMIP) The UFMIP premium amount for all new streamlined refinances is 1.5% [ML 08-23 & ML 08-40.] Borrowers whose loans were in force less than 3 years are due for a pro-rated refund of the UFMIP that they paid on the original loan. This definitely lessens the burden by eliminating the need to pay UFMIP all over again. FHA borrowers are hit twice with Mortgage Insurance and must also pay a monthly premium. However, they?ve already been paying a monthly premium on the existing loan. The new premium seldom goes up by very much and depending on the LTV and loan term, the dollar amount to the borrower can actually be reduced or dropped. Seasoning HUD?s only seasoning requirement is that the current loan be HUD insured. Some lenders impose a six month loan seasoning, yet it?s not a HUD requirement and not required by all lenders. The true restriction comes from the lenders of the loans being refinanced. Most lenders contractually require the loan officer on the original loan to refund, or pay back, the YSP/SRP if the loan is paid off within a certain amount of time ? usually six months or a year. Often, the pay-back is required regardless of who originates the new loan. As an originator, this reinforces the need to keep in contact with prior clients. If it?s in the best interest of a prior client to refinance an FHA mortgage currently in the lender-pay-back-the-YSP period, contact the lender and discuss potential options. Other Eligibility Requirements Some of the other requirements for FHA streamlined refis are: ? The borrower can never get cash back in excess of $500 ? The new loan can never pay off secondary financing. However, new or existing secondary financing may be subordinated without regard to CLTV. ? Non-occupants can never borrow more than the outstanding balance of the current mortgage. The maximum loan is calculated by taking the current balance plus the new UFMIP minus the UFMIP refund. All costs must be paid by the borrower or derived from premium pricing. ? A valid Social Security verification is necessary. Any time the current FHA loan was originated with an invalid SS# (it happens), the outstanding loan is ineligible for a streamlined refinance. ? The maximum loan term is the remaining outstanding term plus 12 years ? Borrowers may not be dropped from title except by devise of law (i.e., divorce, death), and even then, are subject to additional conditions. QUALIFYING Without Qualifying: As previously mentioned, qualifying is not required as long as the borrower fits into all of the eligibility requirements. There is no verification of income, employment, or assets. Additionally, neither credit reports, nor FICO scores, nor CAVIRS are required. A 12 month payment history is customary (or less, if the new loan was originated less than 12 months ago) and is required by the new lender. A payment history is also required by HUD when increasing the P&I. A word of warning: if you provide the lender with a FICO, the lender will use it. A low FICO may cause your loan to be rejected; so remember to NOT provide a FICO unless it?s specifically mandated by the lender. With Qualifying: When removing a borrower from title who doesn?t qualify on his/her own through devise of law (last bullet above), or if the P&I on the new mortgage increases by 20% or more over the P&I on the existing loan ? the remaining borrowers must go through the entire re-qualification process. Examples include dropping parents who originally co-mortgaged on the loan; or, refinancing from a 30 year term to a 15 year term. Although it may seem contradictory to originate a streamlined refinance that requires qualifying, the saving grace is the lack of appraisal required. A no-appraisal transaction is often a deal saver in today?s market. COMMISSIONS & FUND SHORTAGES I find it?s common for originators to end up with far less commission than anticipated. Either that, or funds are required at closing that the borrower just doesn?t have and were never quoted. Both of these circumstances are not only devastating, they are avoidable. With a streamlined refinance it?s always a numbers game. A couple of suggestions: ? Don?t quote an interest rate until you have all of the numbers necessary to calculate an accurate loan amount. ? Take control of all calculations, including the loan amount. The borrower?s interest rate, and your commissions are all intermingled and it shouldn?t be the processor?s problem. ? Always ask the borrower to bring a house payment to the closing table. ? Don?t underestimate the payoff or the amount of prepaid expenses. Especially the expenses necessary to establish a new escrow account at the new lender. It can make a huge difference in the loan amount. ? Recognize that any time the ?existing lien? exceeds calculation number one, (see ?How Much Can I Borrow? above) the difference in funds must come from someplace ? whether it?s your commission, the YSP/SRP or from the borrower And then, if the numbers just don?t work ? consider the ?with appraisal? option. Bottom Line It really is legitimately possible to work less, make more money, and put your client into a better loan. FHA Streamlined refinances are easy and profitable mortgage loans to originate, but you must pay attention to all of the details and nuances. This current low interest rate environment opens the door to an exciting mortgage refinance option that can benefit all parties, including (especially) the loan originator. If you?re FHA approved and serious about digging in, you might as well become a Streamlined Refinance Expert and make your life easier. Leslie Petersen has over 30 years experience in mortgage lending. She?s known for her expertise in the rules and regs of the business, and for showing Originators, Underwriters and Managers how to make the rules and changes work for them. Find her recently revised FHA and VA Streamlined Refinance Handbook at MortgageTrainingTools.com. You can reach Leslie at [email protected].
