Changes going into effect at Freddie Mac on May 1, 2011 may mean that some refinancing options for homeowners will be going away.
Even with political discussions currently underway concerning of the long-term fate of Freddie Mac and Fannie Mae, consumers should still be aware of guideline changes by either of these two mortgage giants that will affect them (and you!) over the short term.
Why do Freddie's changes affect refinancers? Sometimes you can get a better refinance with Fannie Mae, other times Freddie Mac will have a better deal. Changes in Freddie Mac's guidelines could restrict key loan options for homeowners who may already face other challenges in refinancing.
Though the changes at Freddie Mac don't go into effect until May 1, they apply to loans that are delivered to Freddie on or after that date. So mortgage lenders will have to start complying with the new requirements very soon.
Here's a look at some of the big changes and guideline clarifications and what they mean for prospective refinancers. If you are a homeowner contemplating a mortgage refinance, plan to start your Freddie Mac refi as soon as possible to avoid being caught up by these changes.
- Streamlined refinances will be discontinued: Under the latest guidelines, the streamlined refinance mortgage program--a simple and forgiving refinancing option--is eliminated. These refis will no longer be accepted after April 30, 2011.
There's a lot to like about the Freddie streamlined refinance. Freddie currently allows you to refi with a loan-to-value ratio as high as 95 percent; you can roll your closing costs and impounds (property taxes and homeowners insurance) into the refinanced mortgage and even take up to $2,000 cash out as well.
To try to get this kind of refinance underway before the cutoff, you must apply through your current mortgage servicer (the company that collects your mortgage payment).
- Purchase mortgages can't be refinanced immediately: After the changes take place, you'll have to wait at least 120 days after you take out a purchase mortgage before you can refinance.
The need to refinance immediately usually comes into play when you finance a home purchase (for instance, a foreclosure property) with a really ugly initial mortgage (paid large amount of cash to facilitate the transaction, or got a loan with higher-than-market terms) and you want to get rid of it fast--or if you have withdrawn money from investments that you want to return immediately.
- Energy improvement programs get clearer rules: Property Assessed Clean Energy (PACE) programs are a neat way to finance energy improvements, and they make such improvements with long-term payoffs more attractive. PACE programs let homeowners install energy-saving improvements now and pay for them over time in their property tax installments. If the house is sold before the improvements are fully paid for, the new owners take over the payments.
Unfortunately, Fannie Mae and Freddie Mac have decided that they don't want to buy mortgages where local governments have liens on the properties for PACE improvements. Their reasoning is that it makes the loans riskier. Here are Freddie Mac's new guidelines, newly clarified in an announcement:
- You can refinance a home with a PACE lien. However, the lender must structure the refinance to pay off the PACE loan in full if possible.
- If there isn't enough home equity to pull this off, the mortgage lender is allowed to put the loan through Freddie's Relief Refinance program for underwater homeowners. This way, the PACE lien can be left in place.
You can choose your own mortgage lender under Freddie Mac's underwater refi program: The Relief Refinance program comes in a couple of flavors.
Here are some rule clarifications if you use this program to refinance through your current servicer:
- You are not required to requalify as long as your payment does not increase by more than 20 percent.
- If your payment increases by more than 20 percent, your representative credit score (usually the middle score of three or the lower score of two) must be at least 620, and your debt-to-income ratio may not exceed 45 percent.
- You can add or drop a borrower from the mortgage being refinanced for any reason (this should make divorcing folks very happy), provided that the omitted borrower is also removed from the deed and does not retain any ownership interest in the property. You may also add a new co-borrower.
- A new appraisal may not always be required.
If you refinance with a new mortgage lender, you can do so within these parameters:
- You have to requalify and your loan must be fully underwritten, submitted and approved through Loan Prospector, Freddie Mac's automated underwriting system.
- Even with a new mortgage lender, you can remove a borrower from the mortgage being refinanced as long as the omitted borrower is removed from the deed and retains no ownership interest in the home. You can add a new co-borrower as well, but keep in mind that the new application will have to pass muster with Loan Prospector.
- A full appraisal is required, but you can still refinance up to 125 percent of the appraised value.
Hurry if you want a Freddie refinance
If you can qualify for a Freddie Mac refinance, it's smart to shop for the best mortgage rates you can get rather than just taking whatever your current mortgage lender offers you. To kick-start your search for your refinance, you can easily compare current mortgage rates online--and do so before new guidelines spoil your party.
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