FHA Streamline Refinance: Save Money With a Lower Payment
TABLE OF CONTENTS
WHAT IS A FHA STREAMLINE REFINANCE?
The FHA Streamline refinance replaces a borrower’s existing FHA loan with a new one in order to lower monthly mortgage payments or reduce risk. Getting a new mortgage with a lower interest rate or shorter term lowers monthly payments. Converting an ARM to a fixed-rate mortgage reduces risk.
Federal Housing Administration designed Streamline to be fast and easy with reduced documentation and underwriting requirements. Borrowers do not need to verify their income or assets. The property is not subject to an appraisal.
WHEN TO USE A FHA STREAMLINE REFINANCE
Was your first FHA loan a 30-year mortgage? That’s the case for most people. A lot of things change over such a long timeframe, especially interest rates. Priorities change, too. Retirement planning and the idea of living debt free can get folks thinking about paying off their mortgage faster. These are just a few reason people investigate a FHA Streamline refinance. Here are some typical scenarios:
- Prevailing interest rates are lower and you want a new mortgage with today’s rate to reduce your monthly mortgage payments
- You currently have an Adjustable Rate Mortgage (ARM) and prefer a consistent monthly payment amount, so you’d like to convert to a Fixed Rate Mortgage (FRM)
- You want to reduce the interest rate and shorten the term at the same time
FHA STREAMLINE: NET TANGIBLE BENEFIT
The scenarios above each have the potential to improve a borrower’s financial position. FHA guidelines set the standard to prevent borrowers and lenders from refinancing when no apparent benefit can be established. FHA Streamline refinances must produce a net tangible benefit to the borrower.
FHA defines net tangible benefit as:
- A 5% reduction to the principal and interest (P&I) of the mortgage payment plus the annual mortgage insurance premium (MIP), or
- refinancing from an Adjustable Rate Mortgage (ARM) to a Fixed Rate Mortgage (FRM).
For example, if a borrower’s current monthly principal and interest payment is $3,000 per month, the proposed new payment needs to be 5% less, or $2,850. This assumes no there is no mortgage insurance. If there is annual mortgage insurance included in the payment, it must be included in the savings calculation.
Converting an ARM to fixed rate loan is a stand-alone net tangible benefit. Simply, fixed-rate mortgages are not subject to prevailing interest rates, thus they are less risky.
FHA also clarifies that:
- When refinancing to a hybrid ARM, lenders must treat the new hybrid ARM as a fixed rate mortgage.
- A reduction in the mortgage term is not necessarily a net tangible benefit.
Here’s some clarification on that last point. If converting a 30-year loan to a 15-year, the loan must also lower the monthly principal and interest payment. That’s not very likely to happen. So if you want to pay off your mortgage faster by converting it from a 30-year to a 15-year loan, it probably won’t be a FHA Streamline refinance. Other types of refinance programs are available.
Assuming there is a net tangible benefit, your present mortgage is FHA insured and you are not delinquent on your current mortgage payments, the path forward should be pretty smooth.
REDUCED DOCUMENATION & UNDERWRITING
FHA Streamline refinances are faster and easier than other types of mortgage programs because less paperwork is required and some of the bureaucracy is tamped down. Here’s how FHA slims down the Streamline refinance to make it better:
- No minimum credit score
- No appraisal required
- No income documentation required (i.e. pay stubs and W2s)
- Limited asset verification required
- Faster processing and underwriting
- Lower closing costs
FHA STREAMLINE GUIDELINES
If your present mortgage is insured by FHA and you are not delinquent on your current mortgage payments, the path to a FHA Streamline refinance is straightforward. Here are the core guidelines:
- Existing mortgage must be a FHA loan, Streamline refinance is FHA-to-FHA
- Property must be owner occupied (you must live in the house) or an investment property previously occupied by the borrower
- Must be current on mortgage payments – if your mortgage is less than 12 months old, no late payments are allowed
- If your mortgage is greater than 12 months old, no more than two, 30-day late payments in the last 12 months
- You must own the original property for at least 6 months
- No cash-out allowed
FHA 203(k) STREAMLINE REFINANCE
While FHA does not permit regular cash-outs using a Streamline refinance, they do offer a program for FHA borrowers who wish extract equity for home improvements. This loan is called FHA 203(k) Streamline.
- Minimum $5,000 and maximum $35,000 cash-out
- The cashed-out proceeds are then added back to the mortgage principal balance
- All proceeds must be used for home improvement (not paying off car loans, student loans, credit cards, etc.)
- The improvements must be done by a HUD-approved contractor
- Borrowers (DIY folks) can only carry out the work if they can prove they have the expertise to do the work
- Borrowers must get estimates from contractors
- Borrowers must obtain all permits
- The home improvements cannot significantly alter the structure of the home, such as removing a load-bearing wall
- Funds for the work will be pulled from a special escrow account
- Borrowers need to keep track of payments to contractors and ultimately be able to prove the work was done
FHA LENDER OVERLAYS
The FHA Streamline and FHA 203(k) guidelines above are set by the Department of Housing and Urban Development (HUD)’s sub-agency, FHA. FHA insures loans that meet its published guidelines. But FHA doesn’t make loans. That’s handled by private lenders. Why mention this?
While FHA makes the rules for loans that they insure, lenders get final say in how they want to manage their risk, too. Lenders have the latitude to add borrower and property requirements, also known as lender overlays.
For example, FHA does not mandate a minimum credit score but lenders may impose their own credit score requirement. Most lenders look for credit scores of 620 or higher.
FHA STREAMLINE REFINANCE FEES
Streamline loans are faster and easier, but they are not free. Sure, without an appraisal, borrowers can save a little money. But mortgage FHA refinancing still has normal closing costs like an origination fee, escrow fees, title fees, etc. When you apply for a loan, you will receive a Loan Estimate detailing all of the expected closing costs.
FHA STREAMLINE “NO COST” OPTION
Rolling closing costs into a FHA Streamline refinance is not allowed. But there is still a way to avoid coming up with cash for the closing.
Some lenders offer a no closing cost refinance option. Here, borrowers do not pay closing costs out-of-pocket. Instead, lenders pay the closing costs for them. In exchange for picking up the tab, the lender charges a higher interest rate – a premium that recoups loan fees over time.
FHA MORTGAGE INSURANCE REFUNDS
Despite the usual fees, there’s some good news. You may be eligible for a FHA mortgage insurance refund.
If you are refinancing an original FHA loan that was made within the last three years, you may be eligible for an Upfront Mortgage Insurance Premium (UFMIP) refund. FHA insurance refunds are applied to the new mortgage and will reduce than amount of UFMIP due at closing.
Here’s the UFMIP refund schedule:
|Months After Closing||MIP Refund||Months After Closing||MIP Refund||Months After Closing||MIP Refund|
FHA STREAMLINE FAQs
How long do I have to wait since my last Streamline refinance before getting another one?
FHA has a wait period of at least 6 months.
Can I cash-out refinance using a FHA Streamline refinance?
Nope. Streamlines are meant to lower principal and interest payments for borrowers, not to pay off other debts. Cash in excess of $500 is not allowed to be taken out of the home.
Can I convert a VA loan into a FHA loan using the FHA Streamline program?
That’s not an option. The Streamline program states that the original loan must be backed by FHA. It’s known as a FHA-to-FHA program.
Do I need to get an appraisal?
FHA does not require an appraisal but your lender may ask for one. Market conditions play a role in how lenders view risk at any given time. If housing markets are behaving well, lenders may not ask for one.
Do I have to use my current lender to get a FHA Streamline refinance?
You don’t have to use your current lender. Any FHA-approved lender that offers this program can handle the transaction.
Can I refinance an investment property?
Yes, in certain cases. It’s not uncommon for people buy a home with a FHA mortgage, live in it for a while, then move out and rent it. Under these conditions, FHA Streamline refinances are allowed. If you never lived in the home, the FHA Streamline refinance won’t work. However, other refinance programs are available.
What if I’ve missed mortgage payments in the past?
If you took out a FHA loan in the last 12 months, you cannot have any late payments show up on your credit report. FHA is a little more forgiving if you’ve had a mortgage longer than 12 months, allowing two 30-day late payments over a 12-month period.