You’ve likely heard that historically low interest rates mean this is a good time to refinance your existing mortgage.
If your current mortgage is an FHA loan, you may be eligible for an FHA streamline refinance, depending on your current financial situation. On the other hand, you may qualify for refinancing to a new conventional mortgage, VA loan, or other loan program, each with their own advantages and disadvantages.
Because an FHA streamline refinance is so simple, you can quickly learn whether it’s the best option for you to make your current mortgage more affordable.
Let’s look at what an FHA streamline refinance loan is, FHA streamline pros and cons, and whether this option might work for you.
Is an FHA Streamline Refinance a Good Idea?
The FHA streamline loan is a way of refinancing your current FHA-insured mortgage.
Streamline refers to the methods lenders can use to make the process more manageable and easier to navigate. It can be a simple way to reduce your interest rate and get a lower monthly mortgage payment. There are also options available for those with both good and bad credit.
The FHA streamline refinance loan is sometimes called a “low-doc refinance” option. “Low doc” refers to the reduced number of supporting documents borrowers need to provide. Because lenders don’t have to verify your income, and no home appraisal is required, streamline refinance loans often take less time to process. They can also have more economical closing costs.
Keep reading for FHA streamline pros and cons to help you decide if it’s the right option for you.
FHA Streamline Process
For most applicants, an FHA streamline refinance loan is a straightforward and speedy way to make their mortgage more affordable.
To be eligible, FHA requires that a streamline refinance loan must do one of the following for the borrower:
- Lower the interest rate,
- Convert an existing adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or
- Lower the monthly mortgage payment amount
Because of these requirements, the process centers around working with your lender to “do the math” and see if there is a financial benefit to applying.
Do I Qualify for an FHA streamline refinance?
To qualify for the FHA streamline refinance, there are several important conditions homeowners must meet. Starting with your current loan, it must be an FHA-insured mortgage.
If you went through a different program to get your existing mortgage, such as a VA loan, you wouldn’t qualify for an FHA streamline refinance. If you went through the VA loan program, the Interest Rate Reduction Refinance Loan (IRRRL) could be the best refinancing option.
FHA Streamline Refinance Requirements
If your current mortgage is through the FHA, you’ve met the first requirement for a streamline refinance. Let’s look into the additional conditions:
- You can’t be overdue on your mortgage (no missed or partial payments).
- You only had one late payment in the past twelve months, and the last six payments were on time.
- Refinancing must give you a tangible benefit of either a reduced rate for the combined amount of your interest rate and Mortgage Insurance Premium (MIP) or Adjustable-Rate Mortgage (ARM).
- Your new loan cannot be for more than your original loan amount.
- You have had your original loan for at least 210 days (about seven months), and it is in good standing.
What About Mortgage Insurance?
Because you went through the process of getting approved for an FHA loan, you’re already somewhat familiar with mortgage insurance. To obtain your existing FHA loan, you had to pay an Upfront Mortgage Insurance Premium (UFMIP) in addition to an annual amount.
This requirement also applies to an FHA streamline refinance loan. You will need to pay UFMIP at closing, in addition to monthly MIP payments.
The FHA will reimburse a portion of the UFMIP if you refinance within three years.
What Are The Advantages Of An FHA Streamline Refinance Loan?
While an FHA streamline refinance loan is similar to most other loans, it has some very distinct advantages, including the following:
- You don’t need to show proof of employment or income. This can be especially important if you’re one of the more than 5.5 million Americans currently unemployed or under-employed. The FHA considers you eligible for a refinance loan because you met eligibility for your initial loan. The FHA also does not require use of your credit score, although individual lenders can seek a minimum credit score of at least 620.
- A home appraisal is not necessary. The FHA uses your original purchase price to calculate your home’s current value, saving you time, effort, and money, as you don’t need to pay for a new home appraisal. This can be a huge perk if your existing mortgage is “underwater,” or your mortgage loan amount is for more money than your home’s assessed value.
- An FHA streamline refinance is faster and more straightforward than most other refinance options. Because an FHA streamline refinance loan needs less supporting documentation and no home appraisal, it can be processed much faster than other loans — in as little as three weeks for many borrowers.
- You can get the same rate as regular FHA mortgages. Some loans only offer higher interest rates for borrowers with lower credit ratings or reduced eligibility. But the FHA streamline refinance loan offers rates as low as other FHA-backed mortgage loans.
- You aren’t penalized for making additional payments or paying your mortgage off early. If you’re able to make an additional payment or even pay off your entire mortgage early, the FHA streamline refinance doesn’t charge you a penalty to do so. Even an extra payment once a year can help you pay off your mortgage faster and get out of debt sooner.
- Borrowers with little or no home equity can meet eligibility requirements. This is because the streamline refinance loan program allows for increased loan-to-value ratios, compared to most other refinance programs.
What Are The Disadvantages Of An FHA Streamline Refinance Loan?
An FHA streamline refinance loan comes with a few restrictions that can limit the program’s benefits, depending on your situation.
- Because an FHA streamline loan refinances your existing mortgage, your refinance amount cannot be more than your original mortgage amount.
- You will have to cover any closing costs, so you can’t roll them into the mortgage amount. However, you can opt for a “no-closing-cost” mortgage. In this scenario, the lender pays your closing costs, and the borrower typically pays a higher interest rate.
- Arguably the most unpopular downside to the FHA streamline refinance program is mortgage insurance. You’re still required to pay mortgage insurance both upfront when you apply to refinance and monthly.
- If you took out your initial mortgage before June 1, 2009, you would be required to pay UFMIP totaling 0.01% of your loan amount, in addition to a 0.55% annual MIP amount.
- If your mortgage came into effect after June 1, 2009, you would have to pay a UFMIP totaling 1.75% of your loan amount and an annual MIP amount ranging between 0.45% to 1.05% of your loan amount.
It can be challenging to navigate a refinance, especially if your situation is unique. Along with the FHA streamline pros and cons, we can guide you through these choices and ensure that you feel confident about your next move.
If you’d like to learn how refinancing can make your mortgage more affordable, we will help you get the best home refinance product for you. Get in touch with us today about your FHA Streamline Refinance needs.
Photo by Birgit Loit on Unsplash
