An FHA Refinance is a loan adjustment backed by the government and serviced by a direct lender in the FHA program. No matter your credit score, this refinance can give you a 95% loan-to-value on your home. You do not need to make your current month’s payment due to closing. Likewise, the principal balance on the loan will not be reduced by any unpaid principal.

There are several categories of mortgages that are insured by the FHA refinance program, including regular refinances (cash-out and no cash-out) and streamline refinances (with or without an appraisal). Let’s look at these in detail.

Regular Refinances

1. “Cash-Out” Refinances

These are covered at two levels of loan-to-value, 95% and 85%, for all mortgages endorsed on or after October 31, 2005.

a. 95% Loan-to-Value

• The loan will be no greater than 95% of the appraised value.
• The property that is security for the refinance must be a one- or two-unit dwelling.
• The borrower must also have owned and lived in the property as a primary residence for twelve months prior to the loan application.
• All mortgage payments on the property must have been current over the last twelve months (i.e. no more than 30 days late) and the mortgage is current at the present month.
• Subordinate financing can stay in effect, but only in line with the FHA-insured first mortgage, no matter the amount of debt or the combined loan-to-value ratio, as long as the homeowner is eligible for scheduled payments on all loans.
• All co-signers or co-borrowers, if any, must also live in the home on which the refinance applies.

b. 85% Loan-to-Value

• The loan will be no greater than 85% of the appraised value and the borrower must have owned the property for at least twelve months.
• The property in question may consist of one, two, three or four separate units.
• The borrower must live in the property. If the borrower purchased the home less than twelve months before the final application, the mortgage will be determined by using the lesser of the appraised value or by multiplying the original sales price of the home by 85%.
• Inheritance-based properties will qualify for 85% LTV refinance provided they were acquired within the last twelve months and documented by the lender.

2. “No Cash-Out Refinances” (non-streamlined)

Use the lesser of the two values calculated below to determine the maximum value of the mortgage:

• The maximum loan-to-value percentage, multiplied by the appraised value, exclusive of closing costs.
• The sum of the current first lien, any purchase money second mortgage and/or any junior liens over twelve months old, closing costs, prepaid expenses, accrued late charges, escrow shortages, borrower paid repairs required by the appraisal, discount points, and other fees according to the relevant HUD Home Ownership Center (HOC), MINUS any refund of UFMIP.

Prepaid expenses may include: per-diem interest to the end of the month on the new loan; hazard or flood insurance premiums; and mortgage insurance premiums and property tax deposits needed to establish the escrow account.

The existing first lien may include the interest charged by the servicing lender in cases where the payoff is not received by the first of the month. However, the lien may not include any delinquent interest.

Streamline Refinances

Loans in this category involve no cash back to the borrower (unless there are minor adjustments at closing that do not exceed $500). Streamline refinances are intended to lower the monthly principal and interest on an FHA-insured first mortgage, regardless of whether the home has an appraisal.

A streamline refinance requires a checking of the Limited Denial of Participation (LDP) and General Services Administration Debarment (GSA) lists, but not of the Credit Alert Interactive Voice Response System (CAIVRS).

With the exception of lead-based paint, repairs are not mandated by the FHA on streamline refinance transactions, but they can be mandated by the lender, in which case the borrower must pay for the repairs out of pocket.

1. Streamline Refinance with an Appraisal

Use the lesser of the two values calculated below to determine the maximum insurable value of the mortgage:

• The maximum loan-to-value percentage, multiplied by the appraised value, exclusive of closing costs.
• The sum of the existing FHA-insured first lien, closing costs, accrued late charges, escrow shortages, reasonable discount points and pre-paid expenses necessary to establish the escrow account, MINUS any refund of up-front MIP.

The existing first lien may include the interest charged by the servicing lender in cases where the payoff is not received by the first of the month. However, it may not include any delinquent interest.

2. Streamline Refinance without an Appraisal

The lesser of the two values calculated below is  the maximum insurable value of the mortgage:

• The Original Loan Amount: the original principal balance of the current FHA-insured mortgage, as well as up-front MIP and the new UFMIP being charged on the refinance.
• Existing Debt: this is the sum of the existing FHA-insured first lien, closing costs, accrued late charges, escrow shortages, reasonable discount points and pre-paid expenses necessary to establish the escrow account, MINUS any refund of UFMIP plus the new UFMIP.

The existing first lien may include the interest charged by the servicing lender in cases where the payoff is not received by the first of the month. However, it may not include any delinquent interest.

Only homes that are owner-occupied are valid for the mortgage calculation above. Although there are investment properties that may have been acquired as principal residences initially, the current borrowers can only streamline refinance these properties without an appraisal for the outstanding principal balance. The mortgage term will be 30 years or the remaining term plus 12 years — whichever is lower.

Streamline refinances on insured mortgages have been allowed since the 1980s. The term “streamline” does not imply a cost-free transaction; it refers to the underwriting and documentation for which the lender is responsible.

A streamline refinance should meet the following requirements:

• The mortgage is current, not delinquent, and is already insured by the FHA
• The borrower’s monthly principal and interest payments will be reduced by the refinance
• No cash can be taken out on the mortgage.

In some cases, lenders will offer “no cost” refinances (meaning the borrower doesn’t incur any out-of-pocket expenses) in which the new loan is charged a higher interest rate than it would if the borrower paid for the costs of closing. In other cases where the property has enough equity, lenders will include closing costs into the new mortgage amount.

A streamline refinance can be done with or without an appraisal. In the case of an investment property, an appraisal cannot be used to determine the refinance amount.

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There are many benefits and protections that homebuyers get with an FHA-insured mortgage that can’t be found elsewhere:

• Lenders may offer you loan terms to make it easier for you to qualify
• If you’ve had credit problems, even filed bankruptcy, you can still qualify for an FHA loan
• You’ll pay a low down payment, under 3% of the mortgage, and unlike other loan programs, it can be from a gift from a family member, employer or charitable organization
• Low costs with competitive interest rates, since the loan is insured by the federal government
• You’ll have the assurance that you can stay in your home. The FHA has protected consumers since 1934 and provides many options to help homeowners avoid foreclosure.

Adjustments to the Home Affordable Modification Program (HAMP) and programs run by the Federal Housing Administration (FHA) have been put in place to give added relief and assistance to responsible homeowners.

These modifications are intended to give mortgage servicers and originators more flexibility to work with homeowners who are unemployed due to the weak economy, and with those whose mortgage payments exceed their home’s value because of sharp drops in housing markets.

The $50 billion in federal funding for the program changes comes from the Troubled Asset Relief Program (TARP), while the private sector will also share the costs. As many as 4 million homeowners may be helped by these changes, effective until December 2012.

Are you current on your mortgage but owe more than your home is worth? FHA Short Refinance could be a viable option for you and your mortgage servicer.

The purpose of FHA Short Refinance is simple: allow hardworking homeowners to refinance into FHA-insured mortgages that are sustainable and affordable.

When your current lender consents to refinance, you will have the amount owed on your first mortgage readjusted at or less than 97.75% of your current home value.

For every mortgage transaction, the lender is responsible for the estimation of the FHA Settlement Requirements to arrive at the cash amount needed for closing. At settlement, the borrower provide this amount, which also includes the following expenses:

Closing Costs

These include the appraisal fee, inspection fees, loan origination fee, the cost of the credit report, settlement fee, deposit verification fees, and other non-recurring costs approved by the FHA.

Prepaid Items

A FHA streamline refinance is intended to lower the monthly principal and interest on an FHA insured first mortgage with no cash back to the borrower, unless there are minor adjustments (less than $250) at closing. This kind of refinance can come with or without appraisal; if no appraisal is performed, Form HUD 92564-VC is required.

Today Congress passed a bill today to return FHA loan limits to 125% of local area median home prices. The FHA can now back mortgages up to $729,750 in certain areas in the United States. These new loan limits have been extended until 2013 in hopes to stimulate the housing market.

Fannie Mae and Freddie Mac loan limits were not increased and remain at 115% of local area median home prices, not to exceed $625,500.

Any property that the borrower does not occupy either as a principal residence or secondary residence is considered an investment property. Private investors, including certain non-profit organizations, can obtain an FHA-insured mortgage, provided they are approved by the appropriate Housing Opportunities Commission (HOC) and fit one of the following scenarios:

• The purchase of HUD Real Estate Owned (REO) properties
• Streamline refinancing without appraisals

Individual investors can take up mortgages made on investment properties if they qualify on credit.

Adjustable-rate mortgages (ARMs) and graduated payment mortgages (GPMs) are not allowed on these properties.

The FHA does not insure loans that are made in the name of a corporation, business partnership, sole proprietorship or trust. (Streamline refinances for mortgages originally insured in the name of businesses are the exception.)

An analysis for credit risk must be undertaken on one or more individuals together with the business entity or trust. The name of each individual plus the business entity or trust must be on the mortgage note. These parties may also appear on the property deed or title, in which case they must also be on the security instrument (the mortgage, security deed or deed or trust).

Do you have a second mortgage on your home? If your first mortgage’s servicer participates in FHA Short Refinance, you may be able to reduce or eliminate your second mortgage through FHA2LP. If the servicer of the second mortgage participates in the program, your total mortgage debt after refinancing must be no higher than 115% of your current home value.

Are you eligible for this program? You may qualify if:

Government and non-profit organizations can purchase homes with FHA-insured mortgages under the criteria specified below.

Non-profits

A non-profit agency may receive FHA-insured financing on a property that is intended for sale or lease to low-income and moderate-income individuals (i.e. those who earn less than 115% of the median income). The agency’s eligibility for FHA programs and

Secondary Residence

Any property that is occupied by a borrower beyond his or her principal residence is considered a secondary residence.

Homeowners seeking refinance are only allowed to have secondary residences under the following conditions:

• if an undue hardship exists: an HOC must conclude that the borrower has been unable to find affordable rental housing in the area or within a reasonable distance to commute to work; AND
• if the maximum amount of the loan is 85% of the lesser value between the sales price and the appraised value.

Secondary financing is any financing that results in a lien against the property apart from the FHA-insured first mortgage. This financing is not considered a gift, even if it comes without any provisions for monthly repayment (known as a “soft” or “silent” second), or includes measures for debt forgiveness. The amount of the secondary financing must be documented by the provider and indicate all transactions of funds given to the borrower. Copies of the loan instruments must also be added to the endorsement binder.

If a borrower participates in a down payment assistance secondary financing program, the costs from participation may only be included in the second lien amount. The FHA may reject a secondary financing if it does not serve the borrower’s needs, or if the costs to the participants are believed to be greater than the benefits to the homebuyer.

The Real Estate Settlement Procedures Act (RESPA) places limits on how much money a lender can mandate a borrower to keep in an escrow account for paying taxes and insurance. The act also requires the lender to present the borrower with initial and annual escrow statements.

RESPA does not require borrowers to have an escrow account. The lender may choose to have the borrower maintain such an account, but the lender cannot require the borrower to hold an amount greater than the limit imposed by HUD regulations.

About Escrow Account Cushions

Section 203(k) is the main program employed by the FHA to fix and rehabilitate single-family homes. The program is significant for its role in bringing new life to neighborhoods and communities by make homeownership opportunities more widely available.

Streamline 203(k) Mortgage

Under the Streamline (k) Limited Repair Program, homeowners have an additional $35,000 to finance into their mortgages for the purpose of fixing up and making repairs to their homes before they move in. Upgrades and improvements to the property that are identified by an FHA appraiser or home inspector can be covered by cash from this additional financing.

The FHA provides mortgage insurance for properties that consist of detached or semi-detached property dwellings, as well as row homes and townhouses, and individual units in condominium projects that meet FHA approval.

Because FHA only insures owner-occupied principal residences, mortgages on commercial properties (including hotels, boarding houses, bed-and-breakfasts, private clubs, and university fraternity/sorority houses) are not eligible for assistance.

The FHA is not a mortgage lender, but an insurer of loans from private lenders that abide by FHA regulations. To obtain an FHA-insured loan, you should contact multiple lenders and/or mortgage brokers to find out if they will originate an FHA loan. Comparing different lenders is important, since each one will offer different rates and conditions.