FHA Refinance Programs:

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.

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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