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The FHA streamline refinance program makes it easier and cheaper for borrowers who have a Federal Housing Administration-insured mortgage to refinance their loans at lower rates.
FHA streamline refinances are typically easier to get than a traditional refinance, so those undergoing some form of hardship might want to consider an FHA streamline refinance.
What is an FHA streamline refinance?
An FHA streamline refinance is a type of refinance loan available to FHA loan borrowers. It’s called a streamline refinance because the process of applying for the loan is much simpler than a typical refinance.
There’s typically no requirement for an appraisal or credit check, for example. However, if you have solid credit, getting a credit qualification can help you secure a lower rate.
As such, a streamline refinance can be an option for borrowers who are underwater, or owe more on their mortgage than their home is worth.
How does an FHA streamline refinance work?
The FHA streamline program is divided into non-credit qualifying and credit-qualifying refinances. Both types are designed to lower the monthly principal and interest payments on a mortgage backed by the FHA.
The difference is that credit-qualifying streamline refinances require the lender to prove your ability to repay the loan by verifying income, checking credit and confirming your debt-to-income ratio. Those requirements don’t apply to non-credit qualifying refinances.
In general, FHA streamline refinances are similar to a traditional refinance in that they are available in fixed- and adjustable-rate mortgage (ARM) options and 15- or 30-year terms — but, there are a few significant differences. With an FHA streamline refinance loan:
- Appraisals are not required. Regardless of your home’s value, the FHA will insure your loan. It uses the original purchase price of your home in lieu of an appraisal.
- Cash-out refinances aren’t allowed. You can’t take out cash in excess of $500. Any cash that is taken out is only for minor adjustments at closing.
- Refinancing must result in a “net tangible benefit” to the borrower that results in a 0.5 percentage point reduction in the combined interest rate and mortgage insurance premium (MIP). By refinancing, the FHA is looking for you to reduce your loan term, lower your mortgage rate, or both.
FHA streamline program pros and cons
- Lower monthly payment – One of the main benefits of an FHA streamline refinance is the ability to make your monthly payments more affordable. The FHA has guidelines on how lowering the payment can be achieved, but generally there must be at least a 0.5 percentage point reduction to the principal and interest of the mortgage payment plus the mortgage insurance premium to qualify.
- No appraisal required – The loan amount is determined by what you owe and not your current home value. That can be very beneficial for underwater borrowers.
- No income verification – Unlike with a conventional mortgage, you won’t need to verify your income.
- No credit check – Having a low credit score won’t keep you from refinancing with this program.
- Only available to FHA borrowers – If you aren’t currently an FHA borrower, you won’t qualify for this program; it’s not open to borrowers with a conventional mortgage.
- No cash out – The program only allows cash-back amounts of $500 or less for minor adjustments at closing.
- Additional upfront MIP – If you have an FHA loan, you already paid the upfront MIP when you first financed it. When you refinance with an FHA streamline, you’ll have to pay upfront MIP again.
- Strict rules – The FHA has some strict requirements for lenders, so you might not qualify if you’ve missed a payment or gotten another FHA loan recently.
- Net tangible benefit – To qualify, the new loan must have a net tangible benefit, such as reducing your payment by 5% or more, swapping an ARM to a fixed-rate loan, to reducing the interest rate by a sufficient amount, which might be hard to meet for some borrowers.
FHA streamline eligibility guidelines
The FHA streamline refinance program has more relaxed lending guidelines than traditional refinances when it comes to appraisals, credit checks and income verification. Yet it still imposes a number of eligibility requirements for borrowers. The requirements can vary by lender, but here are the minimum standard guidelines for FHA streamlines set forth by the FHA.
1. Your mortgage must already be FHA-insured
This is the primary rule. In order to utilize the FHA streamline program, you must already have an FHA-insured mortgage.
2. You must show a history of on-time payments
To qualify, the FHA requires that you have a steady history of on-time mortgage payments. Fortunately, even if you have made a late payment, you still have some leeway. As long as you’ve made the last six payments on time, you can have one missed payment on your record.
Here’s what the FHA looks for in terms of payment history:
- If the mortgage has fewer than 12 months of payment history, then you must have made all mortgage payments on time.
- If the mortgage has 12 months of payment history or more, then you’re allowed one 30-day late payment in the past 12 months, but you must have made all mortgage payments for three months prior to the date of your application for an FHA refinance.
3. You can only apply after a waiting period
The waiting period is defined as the following:
- You’ve made at least six on-time payments on your current FHA loan
- It’s been at least six months since your first payment due date
- 210 days have passed since the day your current mortgage closed
You must meet all these requirements to be eligible.
4. There must be a ‘net tangible benefit’
The FHA states that there must be a “net tangible benefit” for the borrower doing the streamline refinance. In other words, there must be a legitimate reason for refinancing that improves the borrower’s financial situation.
For instance, if a borrower’s new mortgage payment — principal and interest plus mortgage insurance — would be at least 0.5 percent lower than the original mortgage payment, it would qualify as a net tangible benefit.
Refinancing from an ARM to a fixed-rate mortgage can also qualify as a net tangible benefit.
5. You must pay mortgage insurance premiums
The FHA streamline refinance, like all FHA loans, requires you to pay mortgage insurance premiums (MIP). Getting a streamline refinance will not eliminate MIP.
First, you’ll be required to pay an upfront MIP. This is paid at closing, unless your lender offers a no-cost refinance in exchange for a higher rate.
Next, you’ll pay the annual MIP that is split into monthly installments and included in your mortgage payment each month. Here’s the cost of each premium for FHA loans opened on or after June 1, 2009:
- Upfront MIP: 1.75 percent of the loan amount
- Annual MIP: 0.45 percent to 1.05 percent of the loan amount each year of your loan term
Depending on how long it’s been since you got your initial FHA loan, you might be able to get a portion of the upfront MIP for that loan refunded when you refinance. The longer it’s been, the lower the refund. This refund can potentially help you pay the MIP on the new loan.
Current FHA streamline rates
FHA refinance rates are generally competitive with rates for other loans. You can use a mortgage refinance calculator to see how lowering your rate and increasing your loan term would impact your financial situation.
Overall, if you have an FHA mortgage that’s at least six months old, and you think that refinancing would reduce your rate and lower your monthly mortgage payment, an FHA streamline refinance could be beneficial for you.
How to apply for an FHA streamline refinance
To apply for an FHA streamline refinance, you’ll first need to find an FHA-approved lender. While you can use your current FHA lender, it pays to shop around, as loan requirements and fees vary from one lender to another.
You’ll also need to gather some documentation. Even though minimal documents are required for an FHA streamline refinance, there are still a few essentials you’ll need. These can vary by lender, but here are the basics to keep on file:
- A current mortgage statement to show that payments are up to date
- A current FHA mortgage note to show your interest rate and payment
- Homeowners insurance information
- Two months of bank statements to prove you have enough funds to pay for out-of-pocket costs
When shopping around, remember that there are costs associated with this type of refinance. You’ll have to pay the upfront MIP in addition to monthly premiums. The upfront premium is 1.75 percent of the loan amount. Annual premiums are equal to 0.45 percent to 1.05 percent of the loan amount each year of your loan term.
Along with MIP, your lender might also charge closing costs. Unlike upfront MIP, the FHA doesn’t allow lenders to include closing costs in the new mortgage amount of a streamlined refinance. That’s why some lenders offer “no-cost” refinances at no out-of-pocket expense to the borrower. Instead of closing costs, lenders charge a higher interest rate on the new loan. Of course, you also have the option of paying closing costs in cash.