Chances are that you or someone you know currently has an FHA loan. It is also a pretty good bet they would benefit by refinancing to a lower rate but due to recent FHA changes they will not be able to take advantage of those savings. You see depending on when a consumer took out an FHA loan they paid a onetime upfront Mortgage Insurance Premium that was paid directly to FHA and financed into their new loan. They also agreed to a monthly mortgage insurance charge which is paid to FHA to protect the program from foreclosure loss. This monthly mortgage insurance is primarily the reason that borrowers with FHA Mortgages are no longer able to refinance. See, depending on when you took out your FHA Mortgage during the last 3 years – that rate has fluctuated and increased drastically. It has gone from a .50 percentage rate, to .55 and then .90 and now to its current rate of 1.15%
Now, I want to make sure that I point out that in no way am I saying I disagree with the new calculations for monthly PMI as I understand these calculations were determined to keep a very viable and extremely needed Mortgage Loan program alive. I believe anyone that takes out a new FHA loan on a purchase or refinance from a non FHA Loan to a FHA loan should still pay these new rates.
However, The educated Loan Officer community and I strongly agree and urge HUD to allow anyone that has a current FHA mortgage the ability to refinance their FHA loan using the already in place FHA Streamline No Appraisal Loan Program BUT allow them to keep the same FHA Mortgage Insurance rate that they currently have so that refinancing is a realistic possibility. Let’s take a look at an example of what I mean using the current FHA Mortgage Insurance policies in place.
Customer 1 Current SituationCurrent FHA Loan Balance: $150,000 Original Loan Amount: $152,000 Current Rate: 5.25% Current PMI Rate: .55% Current Payment: Principle & Interest: $841.24 Monthly PMI: $69.67 Taxes & Insurance: $350.00 Total Payment: $1260.91
Customer 1 Proposed RefinanceNew Loan Amount: $150,000 New Interest Rate: 4.00% New PMI Rate: 1.15% Proposed Payment: Principle & Interest: $718.50 Monthly PMI: $143.75 Taxes & Insur: $350.00 Total Payment: $1212.25
You can see in this example that a borrower who refinances a $150,000 loan and reduces their interest rate by 1.25% only saves about $48.00 a month because the PMI rate has gone up. Under current FHA guidelines, underwriters would determine this is not a large enough savings for you and would not allow you to refinance even if you wanted to which I would have to agree with in most cases.
There is some good news though! This could be a very easy fix if we can get Congress to put some pressure on HUD to fix this problem. We would need them to urge HUD to create what is called a new FHA Mortgagee Letter to state that all new FHA refinances where a borrower is refinancing from FHA to FHA without taking cash out to pay off debts would be entitled to pay the same rate of mortgage insurance that they are currently paying on their current FHA loan. In the above example that would make the new proposed payment only $1137.25 and would now save the homeowner $123.66 a month and would be considered a viable option for them. Again really this is an easy fix.
PROBLEM #2 The Escrow Setup!
FHA has offered the FHA Streamline Refinance with No Appraisal option long before we had a declining market. However, the current structure of the program still needs a little tweaking on how they calculate the new loan amount during the refinance because it is leaving many viable homeowners outside looking in. See HUD’s current policy on the program is that if you are going to be doing the FHA Streamline with NO appraisal then they do not want your new loan amount to be any higher than your payoff of your current mortgage and anything over that as far as closing costs and new escrow setups you must bring to the close. This can be the deal breaker for many potential FHA Refinance consumers. See depending on what month of the year you close your lender is going to be required to hold a certain amount of months of Escrow (Real Estate Taxes and Insurance) inside your new loan to pay for upcoming taxes and insurance. So let’s see an example of a lender requiring 7 months of Escrows and see how this can become a problem:Payoff on Current FHA Loan: $150,000 You’re new Loan Amount: $150,000 (with no MIP refund for example purposes) Escrow Setup ($350.00 taxes & Insur. x 7 months): $2450.00 Lenders Charges: $450.00 Title Charges: $750.00 You are required to bring to close: $3650.00
Now realistically many people are not going to want to do this. The reality is that this may still be a very good deal based on the monthly savings but the customer may not have that amount of money for an underwriter to verify or want to part with it if they do. Now, typically most of the costs are re-cooped during the first few months because the customer will get their current escrow amount refunded to them from their current Mortgage company normally within 30 days of closing and they also will skip a mortgage payment due to the new refinance. But if an underwriter cannot verify a borrower has that amount of money available or if the customer does not want to part with those funds – many potential beneficial refinances fall through the cracks.
Is really not that complicated and most Loan Officers would agree that a simple HUD guideline change would still allow HUD to keep their current policy of not increasing the loan amount from the payoff to the new loan amount. We would ask when a customer orders a payoff on their current FHA Mortgage Loan that all FHA Mortgage Loan Servicing companies be told they have to give a payoff with two numbers. The total payoff and a payoff with an escrow refund included instead of refunded up to 30 days after close. The underwriter on the new FHA Mortgage Loan would still be instructed to not allow the new loan amount to exceed the total payoff but instruct the title company to pay off the lower amount with the escrow refund included so that borrowers have a chance to finance their new escrow up to the maximum loan calculation versus coming up with it at close and getting refunded 30 days later and blowing their opportunity to refinance at all. Another alternative to this would be to allow the escrows only to be added to the maximum loan amount calculation but I feel that HUD will not want to increase any loan amounts in a declining market with no appraisal being offered.
The critics are going to say that it would take longer to get a payoff and yes it may take about another day longer but not so long ago many lenders use to give payoffs with the escrow refund included so I have to believe that with today’s technology this is not a hard concept to overcome. This payoff rule would only take place with FHA to FHA Streamline Refinances. Title companies would wire out the payoff amount with instructions that say they are paying the mortgage off with an escrow refund and of course all borrowers would still be responsible for any shortages as they are with any payoff currently.
If we can get these two simple items taken care of and fixed we will see a wave of FHA borrowers refinancing and saving money. Congress has been all over the news telling Americans they want to help them refinance and this is an easy way with no added risk to allow this to happen with just a little tweak to an already in place program. Lets please take a minute and listen to the folks whom do this every day and acknowledge that their input in their respective fields warrant consideration. I would be extremely happy to speak with Congressmen or Senators that would like to hear more options on housing from a professional in the field taking applications on a daily basis.
Also, I ask Realtors and Loan Officers alike who agree with this one solution to please pass this on to as many people and specifically any Congress Representatives and/or Senators. I have placed a link below for you to find a list. You do not have to send this to your local Representatives only as this is would be a Federal policy that would have to be implemented by HUD directly.Thank you very much, Mike Scalise Loan Officer NMLS#207383 Email: email@example.com Phone: (815) 621-9888