Christmas comes in June for Kari, other FHA borrowers

HUD’s financial challenges are well documented. As a result of growing defaults and liabilities, FHA is underfunded and has raised borrowers’ mortgage insurance costs 3 times in the past 3 years. These premium increases left many deserving FHA clients unable to refinance even though their rates were far above the unheard of current average of 3.75% fixed (an all time low). There’s nothing more frustrating to me as a loan officer than trying to explain that deserving clients can’t lower their rates because of increasing HUD fees. Borrowers closed 367,427 FHA streamline loans in 2009 before HUD started raising their fees. In 2010, there were only 252,399 streamlines despite low rates for the bulk of the year. FHA has effectively raised the cost of these loans beyond what makes sense for borrowers.

If Kari, a current client of mine with a $200,000 balance, did a streamline loan today she’d pay (or roll into her loan) a HUD fee of $3500. In addition, her monthly mortgage insurance cost would more than double, making refinancing both costly and inefficient. Dropping Kari’s current 6% loan to 3.75% would save her only about $140 per month after adding HUD fees, probably not worth considering despite the large rate drop. She’d be taking a $3500 step backward in loan balance, and would take about 2 years just to break even on HUD’s fee. Not a horrible deal, but since Kari may consider moving within a few years, refinancing under these terms wouldn’t be in her best interests. In essence, she was trapped in her current loan, regardless of today’s unprecedented low rates.

Effective June 11th, however, FHA borrowers with loans in good standing, insured by HUD before 6/1/2009, will benefit from a new “makes sense” FHA program. They’ll be able to lower their rates using the streamline program but without an increase in their monthly insurance rates, and only a ridiculously small upfront HUD cost. The $3500 fee Kari would pay today will drop to only $20! Talk about an early Christmas present. Kari will save $273 per month, with no appraisal required. I won’t even need her pay stubs or W2s. The loan not only makes sense for her now, it’s an absolute no brainer.

I’m paying Kari’s closing costs for her as well, meaning she will skip a month’s payment (if she wants to) and bring little or no money to closing. Her new loan size will be the payoff on her current loan; nothing will be rolled into it. Even if she moves within a couple of years, she will have saved money every month. Since closing costs average $3000 or more depending on loan size and the state involved, I always enjoy paying them for my clients. Anytime I can lower their rates without charging costs or increasing their loan size, it’s a good thing!

FHA streamline loans do have some requirements: appraisals are required if the loan size increases (but not if it doesn’t!); the payment history on the current loan must be good; lenders must verify their borrowers have a source of income. The new loan cannot have a shorter term than the existing loan (although borrowers can pay extra principal whenever they wish). In this era of vastly increased lending regulations, however, FHA streamlines are by far the simplest loans available today.

Some FHA borrowers, for whatever reason, have stayed in their current loans for several years or more, even as rates have dropped dramatically due to European debt woes and economic concerns. They may well have been discouraged by HUD fee increases or had concerns about their homes’ values in today’s floundering real estate market. I only hope they hear about “Christmas in June” one way or the other, and take advantage of the best program I have seen in my 12 year career as a loan officer.

For questions on the new FHA streamline program, please contact me at trood@wintrustmortgage.com, or call me at 314-740-0004.