Some buyers find that they have built equity in the home a few years after buying it using an FHA mortgage. So they take out a home equity loan or home improvement loan, otherwise known as a second mortgage. While this is perfectly OK, many borrowers don’t know whether they are eligible for an FHA streamline refinance while they have a second mortgage open on their home.
FHA rules allow borrowers to use the FHA streamline if they have a second mortgage, home equity line (HELOC), or home equity loan. However, there are limitations. The maximum loan amount of the first and second mortgage combined can be no more than 125% of the property’s current value.
Compare that with the standard FHA streamline rule, which states a borrower can refinance no matter how much their loan amount exceeds the home’s value.
FHA Streamline Second Mortgage Limits
If a borrower has a $200,000 FHA loan and a second mortgage, the first loan may still be eligible for a streamline up to 125 percent of the original purchase price. Using this same example, the second mortgage may be as high as $50,000 while the FHA first mortgage is still streamline refinance eligible.
If the second mortgage causes the CLTV to exceed 125 percent, the mortgage must be paid down in order for a borrower to successfully close an FHA streamline refinance.
If the Second Mortgage Exceeds Limits
Keep in mind that the FHA streamline refinance can’t pay down or pay off the second mortgage. The second mortgage holder will have to subordinate the loan. This means that the lender will request a document from the lender stating that the second mortgage or HELOC will be in second position behind the new FHA first mortgage.
“Second position” simply means the order in which the loan will be paid off in case of foreclosure. If the borrower fails to pay the mortgage and the home is foreclosed on, the bank will pay off the primary mortgage first. In these situations, second mortgages often don’t get paid off.
The higher risk contributes to higher rates for second mortgages. They are viewed as higher risk. Conversely, first mortgages typically come with low fixed rate, since they are the first to be repaid in a foreclosure or short sale situation.
Why is this important? The first mortgage lender, in this case FHA, needs their loan to be in first position to give you the best available rate on the FHA streamline.
Typically, second mortgage lenders will comply with the subordination request. But there have been instances where they refuse to subordinate. It is within their right to deny a subordination request. However, you can help the success of the process.
Typically your refinance lender will request the subordination from the second mortgage holder. The second mortgage lender or servicer will sometimes issue a subordination denial to a third party, i.e. your refinance lender. But as the customer, you may have better luck pushing your subordination request through. Ask your refinancing lender for your second mortgage holder’s subordination department contact information.
Successful FHA Refinancing with a Second Mortgage
Performing an FHA streamline while you have a second mortgage on your home is a little more complicated, but it can be done. With the right FHA lender and a bit of extra effort, homeowners can drop their mortgage payment even under these circumstances.