Preparing Your Credit for an FHA Streamline Loan

Mortgage rates have dropped to the lowest they’ve been since 1971. These new low mortgage rates have many homeowners considering refinancing, but you might be wondering if you can refinance with your current credit score. 

The Federal Housing Administration (FHA) streamline refinance loans are a simple, effective way to refinance your home, making your mortgage payments more affordable.

If you currently have an FHA loan and have owned your home for more than six months, you may be able to get approved for an FHA streamline refinance without needing a credit check.

If you’re interested in improving your credit score or have improved it since getting approved for your current mortgage, this expands your options for refinancing, such as to a conventional refinance loan. With a conventional loan, having a higher credit rating can improve the terms of your mortgage, making it even more affordable.

We’ve provided a refresher course on credit scores, as well as the details of the FHA streamline refinance loan so that you can decide what refinance option is right for you and if now is the right time to take advantage of low interest rates.

Understanding Your Credit Score

The term “credit score” refers to how you pay off any debt you’ve incurred. Any missed payments or failure to pay off a debt completely can negatively impact your credit rating.

Other issues that can impact your credit score include the risk of missing future payments or if your Debt-to-Income (DTI) ratio isn’t in alignment. This is when someone owes a lot of money, especially credit card debt, but they have a relatively low income.

FICO Credit Score: What is the Current State of Your Credit?

FICO assesses and analyzes credit ratings and classifies them within a range of 300 to 850 points as follows: 

  • If your credit score is between 300-580, it’s considered “Very Bad.” This means many financial institutions will consider you to be high risk in terms of lending you money. It can be difficult to get approved for a traditional loan or line of credit at this level.
  • If your credit score is between 580-639, lenders will consider your credit to be “Bad.” You might qualify for a few specific loan programs or lines of credit at this level but expect a higher interest rate compared to traditional loans.
  • Credit scores between 640-699 are considered “Average” or “Fair.” With ratings in this range, you will meet the eligibility for many conventional loans, but you should expect higher interest rates.
  • With a FICO score between 700-799, lenders will classify your credit rating as “Good.” This is the point at which you will start to earn valuable credit benefits, including lower interest rates and easier approval.
  • The best credit ratings fall within the range of 800-850. With this rating, lenders consider your credit to be “Excellent.” You can easily qualify for practically any available loan or line of credit, and you’ll often get the lowest interest rates available, in addition to favorable loan terms.

Lenders use this numeric rating system to assess someone’s financial stability when applying for loans or other credit benefits to gauge whether they will be able to pay back their loan.

How to Improve Your Credit Score

In many cases, lenders will look at your credit history when you apply for refinancing. So, even though you might have slipped up previously, you could better position your application if you have 12 consecutive months without a late or missed payment.

Your payment history counts for 35% of your overall credit score. This means ensuring your bills are paid in full and on time every month can positively impact your credit score. Tip: Set up automatic bank withdrawal or calendar reminders to help you stay on schedule. 

The amount of debt you carry is responsible for another 30% of your credit rating. Getting rid of debt, especially consumer or credit card debt, will help bump up your FICO number.

A lender can help you assess your current credit score and determine the best plan of action.

What is Refinancing?

Refinancing is when you get a new loan and use it to pay off your existing mortgage loan. The benefit to refinancing is that it can provide a lower interest rate, reduced terms, or a smaller overall loan amount. 

Whether an FHA streamline refinance loan is the right mortgage solution for your situation will depend on several factors.

What is the FHA Streamline Refinance?

An FHA loan is a mortgage loan or refinance loan insured by the Federal Housing Administration (FHA). It is only available from lenders who meet FHA approval. 

FHA loans are geared toward those with low to mid-level incomes and offer a reduced down payment. Borrowers with lower credit scores can get lower interest rates than most conventional loans would offer.

In addition to lower interest rates, the FHA streamline refinance program can often provide extra benefits, including the following:

  • Quicker application processing time
  • Refund of mortgage insurance 
  • Less documentation when applying
  • Home appraisals, credit checks, and income verification are not required

Can I Refinance my FHA Loan with My Current Credit Score?

If your original mortgage was through the FHA, getting approved for refinancing is often much more manageable compared to conventional refinance loans.

The FHA streamline refinance is built around the fact that you own your home and you already met eligibility requirements when you bought it. Because of this, they don’t ask you to prove eligibility all over again. 

Because the FHA insures these loans, you can typically get a lower interest rate and reduced monthly payment without showing income verification such as tax returns or W2s.

If you’ve paid on your current mortgage for at least six months, you may not even need a credit check to get approved. That’s why an FHA streamline with a lower credit score or income is possible without having to prepare your credit to refinance.

FHA Loan Rules for Streamline Refinancing

If your current mortgage is through the FHA, you could be eligible for an FHA streamline refinance regardless of your credit score. 

Here’s what you need to know about an FHA streamline refinance loan:

  • You can typically get lower interest rates based on current market values.
  • It is considered a “low-doc” application. This means you don’t have to provide a lot of new paperwork to be approved, and you don’t need to have your home appraised. 
  • Proof that your current mortgage is in good standing is required. To do that, you’ll have to show you’ve made the last six mortgage payments on time and in full. 
  • It’s possible to eliminate the mortgage insurance premium (MIP) from your initial FHA loan. 
  • To be eligible for an FHA streamline, you must be able to show a “net tangible benefit.” This means there must be an actual benefit to your refinancing,  such as a lower interest rate or a reduced monthly mortgage payment.

The FHA streamline refinance specialists at River City Mortgage can help walk you through the process to identify areas of net tangible benefit for your application.

If you have an FHA mortgage loan and you’ve made your last six monthly payments on time, you might be able to lower your interest rate, reduce your monthly payment, and put money in your pocket with an FHA Streamline Refinance. 

Reach out to us to discuss your options. We look forward to going over the information with you and helping you find the best mortgage product for your home.

Photo by Vlada Karpovich from Pexels

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