Use Caution When Refinancing Current FHA Borrowers

The Federal Housing Administration's reduction in the monthly mortgage insurance premium is the perfect opportunity for originators to fill lackluster post-holiday pipelines. Every borrower who purchased a home in the last one-to-three years using FHA financing is a potential candidate to save money, if they plan to stay in the house long enough. It is important to consider all of the financial calculations to ensure the borrower doesn’t end up spending more money in the long run. The details to consider include:

1) The borrower will be paying a new up-front MIP and will receive a credit that will range from a high of 80% (where the original loan has one month seasoning) to 58% after one year, 34% after two years and 10% in month 36. If there is little or no credit toward the UFMIP, the borrower will have a large sum to overcome.

2) A borrower with a closed loan case number that was issued prior to June 3, 2013 has an annual MIP that will drop when the loan-to-value ratio hits 78%. It may be a disadvantage for these borrowers with a lower LTV to be put into the new cancellation provision where an LTV over 90% will never have the annual MIP drop. This is an Unfair, Deceptive or Abusive Acts or Practices issue! Don't put the borrower into financing that assumes they are getting out of the financing before any specific tipping point.

3) If the borrower does not stay in the house as long as planned, they may end up in a loss.

4) Closing costs may push the total amount of upfront costs to recoup beyond a reasonable time frame. What is reasonable? Is it three years or five years? Be sure you do the math based on the shortest time frame for the borrower's scenario.

5) The FHA annual MIP is based on the average unpaid principal balance throughout the year. Therefore, if the originator uses loan amount to calculate the MIP savings amounts, the amount will be over disclosed and may not reflect the correct savings, if any, to the borrower.

6) Many lenders have credit overlays for streamline refinances and don't want to end up with another lender's servicing problem. The borrower will still need to qualify and pass a credit check and in some cases, the lender may want an appraisal.

Alice Alvey was co-founder of Mortgage U in 1996 and now heads Indecomm’s Mortgage Learning division.