Written By: Bonnie Wilt-Hild
Wow, talk about an increase in volume. With interest rates down there seems to be a renewal of interest in the FHA Streamline refinance program. It actually makes sense really, considering that many mortgages were refinanced into FHA mortgage types during 2008 and 2009 to relieve borrowers who had previously been placed in subprime mortgage types, the burden of excessive interest rates or adjustable rate features. Now here we are, a couple of years later and those very same borrowers are quite possibly in a position to benefit from the FHA Streamline Refinance loan type.
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As I said above, I have seen a significant increase in volume for these transaction types this month and as with any increase in volume, we also tend to see an increase in errors where origination and processing are concerned, and a barrage of questions regarding what can or cannot be done with the program, documentation requirements and of course the daily questions dealing with how to remove a borrower from the loan and title. So with this in mind and of course an immediate personal desire to reduce the foot traffic in and out of my office, I thought I would clear up a few things for everyone and also share information regarding further resources where program parameters are concerned should you need it in the future.
First, let’s talk overview for those of you who are new to FHA and are not entirely sure what the streamline refinance program actually is. I will begin by saying the term streamline these days is somewhat deceiving as the program was modified by HUD in 2009 in order to reduce the growing stem of early defaults where the program is concerned. So with that said it is not as streamlined as it once was but is still less cumbersome in some instances then a full documentation rate/term refinance. There are two ways to complete the streamline refinance transaction, those being with or without an appraisal. Streamline refinance transactions without an appraisal are considered non credit qualifying in most instances (except when removing a borrower or co borrower from the loan) and are limited to a loan amount no greater than the amount of the outstanding principal balance plus 30 days of interest less the MIP refund. In short closing costs and prepaid expenses cannot be included in the new loan amount. A streamline refinance transaction with an appraisal is considered credit qualifying and in terms of loan amount is limited to the amount of the outstanding principal balance plus 30 days of interest less the MIP refund plus closing costs and prepaid expenses not to exceed 97.75% of the appraised value. Discount points may not be rolled into the new loan. These calculations constitute the base loan amount only and the amount of the new UFMIP which is calculated using the UFMIP factors as full credit qualifying refinance transactions can also be rolled into the loan.
The next issue would be determining the appropriate documentation requirements which would depending on how you were completing the transaction and by that I mean with or without an appraisal. Starting with the non credit qualifying transaction which would be the streamline without an appraisal, a lender must document a satisfactory payment history on the borrowers current mortgage, evidence of sufficient seasoning per FHA requirements (6 months for the current mortgage), evidence of sufficient funds to close which would be documented by collecting the borrowers most recent 2 months bank statements and finally documenting that the borrower had income at time of application. Most of the investors purchasing loans on the secondary market require a recent paystub with the Lender
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Certification of Employment however many are now moving away from the tax transcript requirement. Minimum credit score requirements were secondary is concerned are typically 640 however some investors will purchase these loans with a minimum median 620. As far as the mortgage history is concerned the borrower must demonstrate that they have made no late payments on the mortgage if the mortgage is between 6 and 11 months seasoned. If the mortgage is greater than 12 months seasoned, the borrower may have experienced 1x30 day late payment on the mortgage but not in the 90 days preceding loan application. Further a tangible net benefit to the borrower must be documented by determining the reduction in the borrowers principal and interest payment as a result of the transaction will be 5% or greater.
Credit qualifying transactions are similar to non credit qualifying transactions expect for certain items pertaining to credit and income. First, a lender must provide a full 3 merged credit report which determines that the borrower has an acceptable credit history. Mortgage history requirements are the same as with non credit qualifying transactions in terms of late payments and seasoning. Additionally, income must be documented on all credit qualifying streamline transactions as must ratio’s and it must be determined that the borrowers housing to income and debt to income ratio’s meet HUD’s requirements, those being 31/43 respectively. This is done by collecting a borrower’s paystubs for the most recent 1 month period, copies of W-2 wage statements for the most recent two tax years or tax returns for self employed borrowers for the most recent two tax years as well as any other supporting documentation such as a year to date P&L. Should the borrower be relying on other income types such as Social Security Income or income derived from child support or alimony, these income sources must be documented per HUD guidelines. Needless to say, should the loan balance increase by the amount of transaction related closing costs or prepaid expenses, an appraisal is required and any assets required for closing must be documented by collecting the borrowers bank statements for the most recent two months which indicated sufficient funds to close. Tangible net benefit requirements must also be met.
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Finally, it is important to remember then when ordering a case number, the processor must inform the case number assignment system that the case is a streamline refinance transaction and indicate if it is being completed with or without an appraisal. If the property is a Condo then the lender must demonstrate evidence of Condominium approval via appropriate documentation from FHA Connection. If Condominium approval has been withdrawn the case is only eligible as a streamline refinance transaction without an appraisal.
Further information on the program can be obtained by reviewing mortgagee letters 2009-32 and 2011-11 which is where the program guidance as well as certain other requirements can be found and yes for the origination staff out, lender credit towards closing and prepaid expenses can be used on streamlines without appraisals. Hope this helps, and as always, happy underwriting.
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
