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.
Under an FHA streamline refinance, borrowers provide minimum documentation to the lender, even if they owe more on their mortgages than their houses are worth. Lenders don’t have to get an appraisal of the house, check credit or verify income as long as the mortgage is insured by the FHA.
This is one of the reasons those financially affected by the coronavirus may want to consider an FHA streamline refinance. Even if you lost your job or have had trouble making monthly payments, you may still be able to refinance your FHA loan at a lower rate.
How does the FHA streamline program 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:
- 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.
To apply for an FHA streamline refinance, you’ll first need to find an FHA-approved lender. Keep in mind that while you can use your current FHA-approved lender, it pays to shop around. The loan requirements and fees for FHA loans vary from one lender to another, and comparison shopping can help you find the best deal.
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. It can vary by lender, but here are a few documents 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 an upfront mortgage insurance premium (MIP) in addition to monthly premiums. FHA loans originated before June 2009 require an upfront premium of only 0.01 percent. All other loans require an upfront premium of 1.75 percent of the loan amount. Annual mortgage insurance 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 may also charge closing costs. Unlike upfront mortgage insurance premiums, 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 expenses 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.
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.
Requirements vary by lender, but here are the minimum standard guidelines for FHA streamlines set forth by the FHA.
1. The 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 a refinance.
3. You can only apply after a waiting period, defined as the following:
- You’ve made at least six on-time payments on your current FHA mortgage
- It’s been at least six months since your first payment due date
- 210 days have passed since the day your current mortgage closed
4. There must be a ‘net tangible benefit’
The FHA states that there must be a “net tangible benefit” for the borrower. 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 MIP — 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. 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 mortgage insurance premium: 1.75 percent of the loan amount
- Annual mortgage insurance premium: 0.45 percent to 1.05 percent of the loan amount each year of your loan term
Benefits and downsides of an FHA streamline refinance
Like all refinance programs, there are advantages and disadvantages to a streamline refinance through the FHA.
Here are some of the benefits of an FHA streamline refinance over other programs:
- Lower monthly payment – One of the main benefits 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 5 percent 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.
The FHA streamline refinance program does have some downsides, as well. Here are some of the potential pitfalls:
- You must have an FHA loan. 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.
- The program only allows cash-back amounts of $500 or less that are for minor adjustments at closing.
- You pay additional mortgage insurance premium costs. If you have an FHA loan, you already paid an upfront mortgage insurance premium when you first financed. When you refinance with an FHA streamline, you’ll have to pay upfront mortgage insurance premiums again.
- There are strict rules for refinancing. Even though the FHA doesn’t require appraisal for income verification, it does issue some guidelines for lenders. You must have a perfect three-month payment history to qualify — only one late payment is allowed in the last 12 months. In addition, if you’ve recently closed on an FHA loan, you must wait 210 days from your closing date in order to use the FHA streamline program. The streamline must also have a “net tangible benefit” as defined by the FHA, which may be hard to meet for some borrowers.
What are FHA streamline rates today and is it worth it?
FHA loan rates are historically low, and it’s possible to find lenders offering below-average rates. 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.
Featured image by TonyTheTigersSon of Twenty20.