FHA streamline refinance can provide a simple and effective method of reducing the interest rate and monthly mortgage amount for your current FHA mortgage.
Refinancing your mortgage simply means replacing your current mortgage loan with a new mortgage — one with better terms, such as lower interest or reduced monthly payments. If you’re considering refinancing, you may be eligible for the FHA streamline refinance program.
FHA streamline refinance requires less credit documentation and mortgage underwriting from lenders. We’ll dig into the details of how the FHA streamline works, what documents you need to qualify for a streamline refinance loan, and look at whether you should apply for FHA streamline refinance.
What is an FHA loan?
An FHA loan is an insured mortgage loan that is backed by the Federal Housing Administration (FHA) and issued by an FHA-approved mortgage lender. The FHA loan is intended for mid-to-low income borrowers. It requires a smaller downpayment and a lower credit score than most conventional loans.
As of 2020, FHA loans allow applicants to borrow up to 96.5% of their home’s value. To qualify, borrowers must make a 3.5% down payment and possess a minimum 580 credit score. These requirements make them popular among first-time homebuyers. If your credit score falls within 500 and 579, you can still qualify for an FHA loan with a 10% down payment.
Despite its name, the FHA doesn’t directly lend you money for an FHA loan. Instead, your loan will come from an FHA-approved lender such as a bank, mortgage broker, or financial institution, and the FHA will guarantee the loan.
FHA charges a Mortgage Insurance Premium (MIP) regardless of loan type, whether it’s purchase, refinance, or streamline refinance. This premium is typically added to the overall loan amount, either upfront at closing or through ongoing monthly payments.
What is the FHA Streamline Refinance?
In a nutshell, the term FHA streamline refinance refers to a Federal Housing Administration program. It’s designed to give homeowners an easier way to refinance an existing FHA-insured mortgage in good standing, with a lower interest rate.
If homeowners hold an FHA-insured mortgage, can provide proof that the refinance will generate a net tangible benefit, have owned their home for at least six months, and are up to date on mortgage payments, the streamline refinance program can provide several benefits. These benefits can include:
- Reduced refinance and mortgage insurance rates
- Speedy processing time
- Mortgage insurance refund
- Less documentation required, such as no need for income verification, credit check, or appraisal
If a new refinance mortgage would result in monthly payments that are 20% more than the current mortgage, additional factors could come into play. These considerations could include the applicant’s Debt-to-Income (DTI) ratio or their ability to make mortgage payments without defaulting on the loan.
FHA Streamline Refinance Options
There are two options under the FHA streamline refinance program: low doc and cash-out.
Low-Doc, or low documentation, refers to FHA streamline refinance’s ability to process the application without the need for income verification, such as tax returns, pay stubs, and W2s.
Cash-Out refers to a borrower’s ability to withdraw money from the loan amount as a cash deposit, to use for non-mortgage purposes. This option has additional requirements.
How the FHA Streamline Refinance Works
Refinancing a mortgage is similar to how you obtained the first mortgage to purchase your home, with one significant difference: you already own your home.
You’ll start by contacting a lender, providing information, filling out some forms, and going through the approval process. But once you get to the actual application process, that’s where you begin to see differences between conventional loan refinancing and an FHA streamline loan.
Conventional Loan Refinancing vs. FHA Streamline Refinance
For the most part, the FHA streamline refinance program works just like other refinance programs with a few key differences.
It is quick and easy, doesn’t require 20% home equity, and often requires less from homeowners, i.e., no credit check or home appraisal.
Generally, with conventional mortgage financing, you need to have at least 20% equity in your home to be approved, meaning you have already paid off at least 20% of your home’s value. While there’s no mortgage insurance (which can save you hundreds of dollars), conventional mortgages also don’t have a streamlined option — it will take longer to qualify. Eligibility comes with additional credit checks, home appraisal, and a higher credit score.
Are You Eligible For FHA Streamline Refinance?
The first requirement for FHA Streamline refinance eligibility is this: you must have an FHA loan.
If you obtained your loan through a different program, such as a VA loan, Fannie Mae, Freddie Mac, etc., there are different programs you may be able to use to refinance your mortgage, get lower interest rates, and reduced monthly payments.
FHA Streamline Refinance Minimum Requirements
While FHA doesn’t ask for as much documentation as a conventional refinance, the program has strictly-enforced eligibility minimums. In addition to an FHA loan, the following list outlines FHA streamline refinance minimum requirements:
- Mortgage Status: You must be able to prove your mortgage is not delinquent (i.e., missed or late payments); it must be in “good standing.” This means you’ll have to show six months of mortgage payments made on time and paid in full.
- Ownership Minimum: You will need to be able to verify that it’s been at least six months since you bought the property.
- Lender & Bank Requirements: You’ll need to refinance through an FHA-approved lender. If you choose not to stick with your current lender, you must choose one that is FHA-approved.
- Net Tangible Benefit: The refinancing must result in a real benefit to financing, such as lowering monthly mortgage payments.
- Loan Limit: Your FHA streamline loan cannot be for a larger amount than your current loan amount.
- Interest Rate Reduction: Through refinancing, you must be able to reduce your interest rate by at least half a percentage point, 0.50%, in most situations.
No Cost vs. Appraisal Options
- If you opt for a no-cost FHA streamline refinance loan, you must pay closing costs up-front. You do not need a home appraisal.
- If you choose the FHA streamline with appraisal refinance route, you can roll any closing costs into the overall loan amount, provided you have enough home equity to cover the additional expense. A home appraisal is required for this option.
FHA Streamline Refinance Cash-Out Requirements
- Credit Score Minimum: A credit score of 580 is necessary for cash-out eligibility.
- Debt-to-Income Ratio: You’ll have to meet FHA Debt-to-Income ratio guidelines, which measures how much debt you owe compared to your income.
- Loan-to-Value Maximum: Your loan amount cannot exceed 80% of your home’s current value to qualify for FHA cash-out refinance.
- Payment History: You must be able to prove you are not delinquent (because of missed or late payments) in your mortgage. Cash-out eligibility requires you to show 12 months of mortgage payments made on time and paid in full.
Not all mortgage lenders will underwrite all official guidelines set out by the FHA. Furthermore, individual lenders may have additional terms or conditions required to underwrite a streamline refinance loan.
What documents do I need for FHA Streamline Refinance?
The FHA streamline refinance centers on a single core philosophy — since you were initially verified and qualified for the original loan, you don’t need to provide the same information to apply for a refinance under the same loan program.
Furthermore, a home appraisal is often not required because the loan is calculated based on the house’s original purchase price.
FHA offers two methods of streamline refinancing: credit-qualifying and non-credit-qualifying.
- Credit-Qualifying: FHA streamline refinance asks that you provide income documentation. Your FHA-approved lender will also perform a credit check.
- Non-Credit-Qualifying: FHA streamline refinance does not require you to verify your income, although your FHA-approved lender will still run a credit check.
While every refinance application is unique, most people can successfully get an FHA streamline with the following documentation:
- A copy of your current mortgage note showing the terms of the loan and its rate
- Most recent mortgage statement showing payments are up to date with no late, missed, or incomplete payments
- Homeowner’s insurance declaration page showing proof that your home is insured
- Driver’s license and Social Security card
- A copy of a current utility bill
- The Final Closing Disclosure and all pages of the Purchase Note for your current mortgage
- These are included in the final paperwork you received at closing when you bought your home.
- The Disclosure is approximately 3-5 pages in length and is often located in the front of the documentation.
- The Purchase Note will clearly state “NOTE” at the top. It’s 2-3 pages in length and lists the specifics of your current loan.
Can You Do FHA Streamline Refinance More Than Once?
Provided you meet the FHA requirements for eligibility — including it’s been 210 days or longer since your last refinance, you are not delinquent on your mortgage payments, a new refinance loan will lower your rate and have a real benefit to you — then yes, you can get the FHA streamline refinance more than once.
Mortgage Insurance Premium (MIP) and Private Mortgage Insurance (PMI)
- If you purchase a home through a conventional loan with a downpayment of less than 20%, your lender will ask you to buy Private Mortgage Insurance (PMI) to minimize its risk lending to you.
- FHA loans don’t require PMI. But if you purchase a home with a downpayment of less than 20%, and you’re going through the FHA streamline refinance loan program, you’ll have to pay for a Mortgage Insurance Premium (MIP) policy.
Private Mortgage Insurance (PMI)
The Mortgage Insurance Premium (MIP) is an insurance policy used on FHA loans if you have less than 20% for a down payment. The FHA can calculate the MIP in a couple of different ways.
- Upfront MIP (UFMIP) is done at the time of closing.
- The annual MIP is a long-term expense. If your down payment is at least 10%, you can expect to pay it every year for 11 years. A down payment of less than 10% means the MIP will last for the duration of your loan. It’s calculated every year, reducing slightly with each annual calculation.
Factors that contribute to your MIP annual rate include loan duration and Loan-to-Value (LTV) ratio.
Private Mortgage Insurance (PMI)
Lenders use Private Mortgage Insurance (PMI) to protect them against foreclosure or default risks. But it doesn’t end there. PMI allows potential homeowners who are unable to make a 20% downpayment get affordable mortgage rates.
FHA Streamline Refinance Pros and Cons
Pros
An FHA streamline refinance can offer several benefits for homeowners hoping to reduce their mortgage:
- There’s no credit check or proof of income required.
- It’s relatively straightforward to meet eligibility requirements.
- It requires less documentation than conventional refinance options.
- You don’t need to get your home appraised.
Cons
Arguably, the most significant drawbacks of applying for an FHA streamline refinance loan center around paying Mortgage Insurance Premiums and closing costs:
- Upfront and annual MIP premiums tend to be higher for those with newer FHA loans.
- MIP costs can mean your payments might also increase.
FHA Streamline Refinance FAQ
There’s a lot of information in this article, so we’ve pulled the answers to some frequently asked questions to help with your research.
How Much Income Do I Need to Qualify For An FHA Streamline Refinance Loan?
There is no minimum income requirement to qualify, and proof of income is not required to apply for the FHA streamline loan.
What Is The Minimum Credit Score to Apply For An FHA Streamline Refinance Loan?
While a minimum 580 credit score is generally needed for an FHA streamline refinance loan, applicants with a FICA score between 500 and 579 can often qualify with a 10% down payment.
Will An FHA Streamline Refinance Eliminate the MIP?
No, it does not eliminate the Mortgage Insurance Premium.
Refinanced FHA loans are still required to have annual mortgage insurance in addition to an initial Mortgage Insurance Premium.
If you apply for an FHA streamline refinance within three years of your original FHA loan, you may be eligible to have part of your initial upfront MIP fee returned. This can lower your mortgage’s overall amount.
What is a Net Tangible Benefit?
To qualify for an FHA refinance, you must show the loan will have a real-world benefit. This is called the “net tangible benefit” and is generally defined as a 5% drop in the monthly payment from a reduced interest rate or a monthly mortgage insurance rate, or a combination of the two.
Can I Use An FHA Streamline Loan For Home Repairs?
An FHA streamline refinance Low-Doc option only covers the mortgage and cannot be used to pay for home repairs.
If you’re looking to make home improvements, the Cash-Out option might be a suitable choice. While this option comes with increased eligibility requirements, if approved, you can use the money from the refinance to pay for home repairs, pay down other debt, or toward any other expenses of your choosing.
Should You Apply For The FHA Streamline to Refinance?
An FHA streamline refinance is generally the easiest way to refinance your FHA loan and get a better rate. It helps most applicants save money if their FHA loan originated before June 1, 2009. But there’s no guarantee you’ll save money if you took out a loan following that date.
This program offers the benefit of a lower interest rate and the potential to reduce your mortgage loan terms. It’s essential to evaluate all of the program’s potential pros and cons and consider how they might affect you before deciding if this is the best mortgage product for you and your family.
We’d love to sit down with you and go over your options to help you make the best decision.
For more information or to arrange a personal no-charge consultation at our office or your kitchen table, reach out to the FHA regional loan officers at River City Mortgage. We can’t wait to speak with you.
Photo by Jacques Bopp on Unsplash
