New FHA Rules Ease Refinancing

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Under new streamlined refinancing rules, some FHA borrowers will be permitted to use the equity they've built up in their homes to finance closing costs. Thus, they may not have to bring any of their own money to the settlement table.

The revisions, said Sean G. Cassidy, General Deputy Assistant Secretary for Housing and Deputy Federal Housing Commissioner, "are designed to assist those home owners already in FHA's portfolio to reduce their monthly mortgage payment with as little cash out-of-pocket as possible."

Previously, FHA borrowers who wanted to turn in their old loans for new ones could do so only up to their current loan balances. If they wanted to refinance larger amounts, they had to give up their government-insured loans altogether and obtain a new conventional mortgage.

Now, though, the agency will allow those borrowers who have paid down additional principal or whose mortgages have otherwise amortized sufficiently to add some or all of the closing costs to the new mortgage and, thus, not be burdened with having to come up with additional cash at closing.

For example, if the owner's unpaid principal balance has declined by $1,000, that amount in closing costs may be included in the new loan amount.

The new loan amount may not exceed the lesser of the original principal of the loan being refinanced or the sum of the outstanding principal balance of the existing mortgage plus closing costs.

Also, the new rules apply only to owner-occupied properties. Non-occupant owner properties, even if originally acquired as principal residences, may only refinance the outstanding balance of the existing mortgage.

The FHA also has changed the mortgage amount calculation process for streamlined refinance transactions so that refinacers will not be forced to make larger downpayments.

This change, said Cassidy, will "especially benefit those home owners who purchased using FHA's "downpayment simplification" procedure by allowing them to avoid additional out-of-pocket expenses when refinancing to lower their monthly payments.

In announcing the changes, the FHA made it clear to lenders that it expects the refinance transaction to be in the owner's best interest. Some lenders have been accused of persuading unsophisticated borrowers to refinance when it is not to their benefit just to earn a new set of fees.

The new mortgage, FHA says, must "result in an improvement to the affordability of the monthly mortgage payment and not be a vehicle for churning new mortgages."

The agency also reminded borrowers that they are expected to make their monthly mortgage payments when due, even when refinancing. It is not appropriate to include in the new mortgage amount the sum of any mortgage payments that have been "skipped," it said.

For example, a borrower whose mortgage payment is due June 1 and expects to close on the refinanced loan before the end of June is not permitted to roll the June payment into the new FHA loan amount. The borrower is to either make the payment when due or bring the monthly mortgage payment check to settlement.

Finally, the FHA said that while appraisals on existing homes are current for six months, they cannot be "re-used" during this period once the mortgage for which the appraisal was ordered has closed.

Thus, an appraisal used for the purchase of a property cannot be used again for a subsequent refinance even if six months has not passed. A new appraisal is required for each refinance transaction requiring an appraisal.