FHA borrowers could save through refinancing program

An estimated 2 million to 3 million homeowners could save an average of about $3,000 a year, thanks to upcoming changes in the Federal Housing Administration's popular “streamline” refinancing program.

Q. We have tried to refinance our FHA mortgage twice in the past few years, but each time our application was rejected. Will the changes that President Barack Obama announced to the Federal Housing Administration a couple of weeks ago finally help us dump our high-rate loan?

A. Probably. The White House estimates that up to 3 million borrowers whose loans are backed by the FHA could save an average of $3,000 a year from the changes announced to the agency's popular “streamline” refinance program, so I'm devoting this week's entire column to answering some common questions about the plan and its upcoming revisions.

The FHA does not issue loans directly to borrowers, but instead insures purchase and refinance mortgages that are made through a network of thousands of independent lenders across the nation. The process encourages lenders to make loans to buyers who make a down payment as small as 5 percent, because they know the insurance will reimburse them for some or all of their losses if the mortgage turns sour.

Some lenders are already advertising the benefits of the revamped streamline refinancing plan, even though it technically won't be available until June.

Streamline loans require a fairly minimal amount of paperwork to complete. More importantly, most of them do not require a new appraisal. That means that the countless people who owe more than their property is worth — commonly called “underwater” owners — can refinance with an FHA loan.

Q. We wanted to do a streamline refinance last year, but the upfront fees would have been enormous, and we didn't have enough cash to pay them. Did the FHA make any changes in this area?

A: Yes, a major modification will be a sharp reduction in the upfront fees that many future refinancers will have to pay. Until now, the program's high fees prevented many cash-strapped borrowers like you to take advantage of the record-breaking decline in interest rates in the past couple of years.

For example, a borrower who wanted to refinance a $200,000 loan under the program previously would have had to pay $2,000, or 1 percent of the loan amount, upfront for the new insurance policy. The revamped program slashes that figure to a mere .01 percent for qualified borrowers, saving $1,800.

The savings would continue in future years because FHA will also cut the annual premiums to maintain the policy by more than half, from 1.15 percent of the loan balance to 0.55 percent.

Q. My credit score dropped while I was out of work for several months and was unable to pay a few of my credit-card bills on time. Is that going to be a problem?

A. Probably not. The FHA does not require a lender offering streamline loans to check a borrower's credit, employment or even verify income. Some banks will continue to do so, but others won't.

Q. This sounds like a great program. Can I get a streamline loan even though my mortgage is not insured by the FHA?

A. Sorry, but no. Only borrowers whose loans are already backed by the agency can qualify for the streamline plan.

There are a couple of other eligibility requirements. The loans are available only to borrowers who have promptly made each of their past 12 monthly payments.

In addition, while most current FHA borrowers are eligible for a streamline refinance loan, the reduced fees only apply to borrowers who took their current mortgage out before June 1, 2009. Borrowers who obtained their loans after that date don't qualify for those savings, although many of them are already paying ultralow rates, so refinancing now probably wouldn't make good financial sense anyway.

It's also worth noting that the FHA will soon increase fees to use most of its other mortgage programs, so borrowers who plan to access one of the administration's various home-buying, refinancing or remodeling loan plans should contact a local bank or mortgage broker immediately to get their paperwork under way.

You can get more information, including the names of FHA-approved lenders and brokers in your area, by calling the agency at (800) 225-5342 or by visiting www.fha.gov.

Ÿ For the booklets “Straight Talk About Living Trusts” and “Refinancing the Right Way” send $4 for each and a self-addressed, stamped envelope to David Myers/Refi, P.O. Box 4405, Culver City, CA 90231-4405.

© 2012, Cowles Syndicate Inc.