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- An FHA streamline refinance is an option for FHA loan borrowers looking to lower monthly payments or switch from a fluctuating to a fixed-rate mortgage.
- The FHA application process is much simpler compared to a traditional refinance, and you can opt for a non-credit qualifying or credit-qualifying refinance.
- To qualify, you must demonstrate that the refinance will improve your financial situation, also known as a ‘net tangible benefit’.
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 traditional refinances, so those undergoing some form of hardship might want to consider one.
Here’s everything you need to know about the FHA streamline refinance and how it works.
What is an FHA streamline refinance?
An FHA streamline refinance is a type of refinance loan available to FHA loan borrowers. As with any refinance, it involves taking out a new mortgage that you use to pay off your current one. It’s called a streamline refinance because the process of applying for the loan is much simpler than that of a standard refinance from a conventional lender.
There’s typically no requirement for an home appraisal or (in some cases) a credit check, for example.
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.
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: The lender can do the refinance without them.
However, getting a credit qualification can help you secure a lower rate. So if you do have a high credit score, that’s the refinance to aim for. But borrowers who are underwater (that is, owe more on their mortgage than their home is worth) or who have some blots on their credit history could still refinance with the non-credit qualifying version.
Pros of an FHA streamline refinance
These loan products offer several benefits to current FHA borrowers.
Lower monthly payment
The FHA has guidelines on how to make your monthly payments more affordable, but generally there must be at least a .05 percent reduction to the principal and interest of the mortgage payment plus the mortgage insurance premium to qualify.
No appraisal required
The refinance loan amount is determined by what you owe on your current mortgage, and not your current home value. That can be very beneficial for borrowers whose property’s worth has dropped a little or a lot, putting them in a negative equity situation.
No income verification
Unlike with a conventional mortgage, you won’t need to verify your income. So, you likely won’t need to gather extensive income documentation, like pay stubs or W-2 forms.
No credit check
Having a low credit score won’t keep you from refinancing with this program. You can choose a non-credit qualifying refinance to increase your approval if your credit score is on the lower end.
Faster time to close
Because a streamlined refinancing doesn’t have a long underwriting process, you can probably finalize faster — especially if you’re able to get a non-credit qualifying loan with little documentation required.
Cons of an FHA streamline loan
As with any home loan, the FHA streamline loan has also drawbacks to consider.
Limited to current FHA borrowers
If you don’t have an FHA loan now, you won’t qualify for this program. It’s not open to borrowers with a conventional mortgage.
No cash out
Additional upfront mortgage insurance premium (MIP)
Remember how, when you took out your original FHA loan, you had to make an upfront MIP payment? When you refinance with an FHA streamline, you’ll have to pay upfront MIP again.
The FHA has stringent borrower requirements lenders must abide by. So you might not qualify if you’ve missed a payment or gotten another FHA loan recently.
To qualify, the new loan must have a net tangible benefit to you, the borrower. Such benefits could include reducing your monthly payment by .05 percent or more or reducing the interest rate by a sufficient amount to get you to that .05 percent. Exchanging an ARM for a fixed-rate loan also qualifies as a benefit, but the new loan’s interest rate can’t be more than 2 percentage points above the old. In other cases — like going from a fixed-rate loan to an ARM, one fixed-rate loan to another, or one ARM to another — the new interest rate must be a certain number of percentage points below the old one.
Current FHA streamline rates
FHA refinance rates are generally competitive with rates for other loans. And, like a first mortgage, you can usually choose between 15- and 30-year terms or an ARM loan. 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.
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. 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.
Say you still have 300,000 left on your mortgage at 7 percent interest, and your principal and interest payment amounts to $1,995 per month. If you can refinance down to even 6.5 percent, your new payment would be $1,896 per month, saving you almost $1,200 per year.
Refinancing from an ARM to a fixed-rate mortgage can also qualify as a net tangible benefit.
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. 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 on time for three months prior to the date of your application for an FHA refinance.
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 another upfront MIP. This premium 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.
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. The best FHA mortgage lender for you will depend not just on the current rates they’re offering you, but their fees and closing costs, and level of service.
You’ll also need to gather some documentation. Even though minimal documents are required for an FHA streamline refinance, you will still need to provide some details about your mortgage and financial situation.
Refinancing your home with an FHA streamline loan may or may not affect your credit score. If you opt for a credit-qualifying loan your lender will pull your full credit report. This could temporarily lower your FICO score. If you have a non-credit qualifying loan you may not see any drop at all because the lender probably won’t do a hard pull.
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.
What documents do you need for an FHA streamline refinance?
Required documents may vary by lender, but here are the basics to keep handy:
- 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
FAQs on FHA streamline refinance
There are two FHA streamline refinance options: credit-qualifying and non-credit qualifying. Both make refinancing your FHA loan a more seamless process, but the latter may not require an income verification. It’s also more ideal for borrowers with less-than-perfect credit.
If you seek an FHA streamline refinance as a non-credit qualifying applicant, your credit score won’t be impacted. But if you apply as a credit-qualifying applicant, the lender will do a hard credit pull that could ding your credit score for a short period.
FHA borrowers can do an FHA streamline more than once. However, the applicant must meet the program’s guidelines to qualify for a new loan each time: the waiting period, the net tangible benefit, etc.