If you are considering doing an FHA refinance and getting cash out, as of January 1, there are some new rules regarding FHA refinances where the borrower gets “cash out” and the loan-to-value ratio is greater than 85%.

These guideline changes apply to the FHA 95% cash out program and are effective for all FHA case numbers that are issued after January 1, 2009. If you are getting less than 85% of the value of your home, these guideline changes do not apply.

• The property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.
• If the property is encumbered by a mortgage, the borrower cannot have been more than 30 days late within the last 12 months and the borrower must be current on their mortgage payments.
• The property must be either a 1or 2 unit property, 3 and 4 units are not eligible.
• Second mortgages may remain in place, but must be in 2nd place behind the FHA insured first mortgage.
• If another person is added to the loan in the refinance, the person must be an occupant of the property. You cant add someone who doesn’t live in the property to the loan in order to meet FHA’s credit underwriting guidelines for the mortgage.

Whenever you go up to 95% loan-to-value, you will now be required to get two appraisals done.

From Mortgagee Letter 2008-40:

In addition, FHA will now require a second appraisal for all cash-out refinances where the LTV, exclusive of the UFMIP, will exceed 85 percent of the appraiser’s estimate of value.  This second appraisal requirement applies regardless of the loan amount or the location of the property, i.e., whether the property is in a “declining area” or is not.  This second appraisal requirement for cash-out refinances is effective for all case number assignments on or after January 1, 2009 and is to adhere to the instructions set forth in ML 2008-09.  Please also note that cash-out refinances with LTVs exceeding 85 percent will be over-selected for post-endorsement technical reviews (PETR) to assure the quality of the underwriting.

Mortgagee Letter 2008-09 sets out the requirements for the 2nd appraisal. It must be done by an FHA approved appraiser engaged by the lender and the costs may be passed on to the borrower. If the second appraisal has an estimated value more than 5% below the first appraisal, the maximum mortgage must be determined based on the lower appraised value.

What this means in simple english is that if you want to get cash out of your home, it is going to be more difficult than it has been in the past.  Lenders are going to require two appraisals and lenders are going to be picking apart the appraisals more than ever. For people who are thinking of using the 95% cash out program, that means somewhere in the neighborhood of $700 in appraisal fees.

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• Arizona FHA Mortgage Refinance Options: Which Ones Are Real?

FHA Hope for Homeowners, FHA Secure, FHA Streamline, FHA 95% Cash-out, FHA 203k Streamline, FHA Short Refinance… these are all “real” options for people who are currently in an FHA loan and looking for FHA refinancing options.

Supposedly.

Some are more real than others.

Let’s start with the “most real” FHA refinance programs and identify who can benefit from them.

FHA Streamline Refinance Program

If you are currently in an FHA loan and have noticed the recent drop in interest rates and just want to lower your monthly payment as a result of getting a lower interest rate – this is the program for you.  The FHA streamline program is designed to allow FHA borrowers to take advantage of lower interest rates without having to completely re-qualify for a new loan.

Highlights of the FHA Streamline program include:

• No appraisal is required on FHA streamline-without-appraisal program
• No income documentation is needed
• No asset documentation is needed
• No credit score required, only a “mortgage rating”

The FHA streamline refinance program is by far the most popular with FHA borrowers when interest rates drop – because it allows them to lower their interest rates with minimal hassle and without having to completely re-qualify for a new loan.

FHA 95% Cash Out Refinance Program

The FHA 95% cash out refinance program is for homeowners who are currently in an FHA loan and want to convert some of the equity in their home into cash for any reason. In mortgage-guy-slang, the process of converting your equity into cash is called “Cash-Out” and it could include paying off credit cards, cars, other miscellaneous debt or simply getting a check at closing.

Some (not all) of the guidelines of the FHA 95% cash out refinance include:

• Full income and asset documentation are required
• Full FHA appraisal is required
• Home must be a primary residence
• Low-mid FICO score of 580 or higher
• Must have lived in the property for the last 12 months

As home equity was rising in past years, the FHA 95% cash out loan was very popular – but going forward, I think it will be more common to see people participate in the FHA Streamline program when refinancing due to declining home values.

FHA 203K Streamline Refinance Program

The FHA 203k Streamline program has gained popularity recently due to the number of foreclosed homes that are being purchased that are in need of repair.  The FHA 203k streamline program can be utilized both as a FHA refinancing option as well as a FHA new home purchase option.

The FHA 203k Streamline is a modification of the standard Section 203k loan in that it only allows limited repairs costing at least $5,000 but not greater than $35,000. The total mortgage amount will allow for acquisition of the property and up to $35,000 in the loan proceeds to be applied toward repair or rehab of the property.

Some of the most common repairs done under the FHA 203k Streamline program include:

• Repair gutters and downspouts
• Repair/upgrade of existing HVAC systems
• Minor repairs of plumbing and electrical systems
• Minor repairs of existing flooring
• Minor remodeling that does not involve structural repairs
• Exterior and interior painting
• New appliances – which may include free-standing ranges, refrigerators, washers/dryers, dishwashers and microwaves but may not exceed $2,000
• Improvements for accessibility for people with disabilities

In addition to the FHA 203k streamline program, there is a FHA 203k standard program — which will allow more than $35,000 to be used in repairs but requires more “major” work.

FHA Secure Refinance Program

The FHA Secure mortgage program is where the FHA refinance programs start becoming a little less “real”.

That doesn’t mean that they don’t exist — it just means that many people who try to qualify for this program end up with something different than an FHA secure loan.

The FHA Secure program was announced by President Bush in August of 2007 and according to estimates at the time, hundreds of thousands of families would benefit from the FHA Secure program.

Recently, HUD Secretary Steve Preston recently went on the record to say that FHA has helped more than 325,000 mortgage borrowers refinance during the current crisis.  While that may sound good, the truth is something different:  Yes, there have been hundreds of thousands of FHA refinances.  However, only about 1% of these FHA refinances were with borrowers who had already defaulted.

That would indicate that FHA Secure has only helped a few thousand people, not hundreds of thousands of them.

The FHA Secure program guidelines state that in order to be eligible for the FHA Secure program, you must meet the following criteria:

• Your current loan must be a non-FHA Adjustable Rate Mortgage.
• You must show a sustained history of employment.
• You need sufficient income to make the new mortgage payment.
• You need to show a history of on-time mortgage payments “prior” to the borrower’s ARM loan resetting to the higher rate.
• The Adjustable  interest rate must have either reset or be scheduled to reset between June 2005 and December 2009.
• Mortgage late payments are allowed after the reset date if they are directly related to your higher loan payment.  In addition, if you are in a mortgage payment plan because of late payments and there is sufficient equity in the home, the late payment amounts can be rolled into the new loan.
• Second mortgages are possible under certain specific conditions.
• A minimum of 3% cash or equity in the home.

In my experience, every single person who has inquired of us since this program launch about the FHA Secure program has not ended up with an FHA Secure loan.

FHA Hope for Homeowners Refinance Program

The FHA Hope for Homeowners refinance program was launched by HUD in October of 2008 and is designed to refinance mortgages for eligible borrowers who are having difficulty making their payments, but, after a write-down in principal, can afford a new loan insured by FHA.

Is the FHA Hope for Homeowners program “real”? As we have said before “we think so…” but it has been our experience that people who are interested in the FHA Hope for Homeowners program end up doing an FHA Short Refinance or a Loan Modification with their current lender.

And the current numbers seem to agree with our experience — there have been fewer than 100 applications NATIONWIDE since the programs inception.

FHA Short Refinance

I saved the FHA Short Refinance for last because it isn’t “really” an FHA program.  The concept behind the FHA Short Refinance is that you get your existing lender to write down your current loan balance to 95% of your current market value and accept a short payoff — much like a short sale except for the fact that you get to stay in the home and end up with an FHA loan.

From Arizona Short Refinance expert Paul Dunn:

An FHA Short Refinance is when a home owner refinances a loan where they owe more on their mortgage than their current mortgage is worth. FHA Short Refinance applicants are upside down on their equity, and so they need an FHA Short Refinance. The only way to refinance the home for any reason, is if the current lender takes a “short pay” on the amount owed and writes it off as a loss, thus the FHA Short Refinance. It is basically the same as a short sale with the exception that the home owner keeps their home.

And what happens if the FHA short refinance doesn’t work?  According to Paul:

An FHA Short Refinance is the goal for our work, but it does not work in every situation. In the case where an FHA Short Refinance does not work, you still may be able to negotiate a loan modification with your current lender to improve the terms on your existing mortgage. You may also elect to put your home up for a “short sale” and if you do we can provide you with an excellent Realtor referral in your area who specializes in this type of transaction. If you elect a short sale, it is important to work with a Realtor experienced in the short sale process.

We are very lucky to have one of the mortgage industry’s leading experts on FHA Short Refinances living right here in Arizona.  Paul has been kind enough to teach us a thing or two about getting these FHA Short Refinances done. Thanks Paul!

In Summary

The FHA Streamline, FHA 95% cash out and FHA 203K Streamline programs are very “real”. Most of the people that we talk to who are interested in one of these options end up with one.

The FHA Secure, FHA Hope for Homeowners and programs are less “real”.  This doesn’t mean that they don’t exist — It just has been my experience that most people who are searching for these as a solution end up with either a loan modification from their current lender or attempting to do an FHA Short Refinance or just walk away from their current home.

Related Posts

• FHA Streamline Refinance: Getting Tougher To Do
• Arizona FHA Loans: Home Repairs, Which Ones Are Required?
• FHA Refinance Streamline: More Information
• Arizona FHA 95% Cash Out Rule Changes: Two Appraisals Now Required