The FHA Streamline Refinance Program: A Primer
Do you already have a Federal Housing Administration loan? Are you thinking about refinancing it? To save yourself both time and money, you might find yourself drawn to the FHA Streamline Refinance program.
With no property appraisal, income or employment verification or even a credit-score check required, it’s an easier, faster alternative to the typical FHA loan that can benefit you in several ways. These benefits can include decreased monthly payments, lower interest rates and a reduced term for your loan.
Overview of the FHA Streamline Refinance program
You may qualify for the FHA Streamline Refinance program for a primary residence if you can demonstrate that you’ve been making payments on time and in full for at least one year. Unlike a conventional refinance, the refinance program requires substantially less documentation, said David Hosterman, a loan officer and regional manager at Citywide Home Loans, and based in Centennial, Colo. This is because your original loan has already met the requirements for getting FHA-insured.
With a traditional refinance, you may need to provide pay stubs, tax returns, a home appraisal and other documentation, but none of these is used to determine eligibility for the FHA Streamline program. “The lender will pull a mortgage-only credit report, but they won’t take into account other liabilities you might have,” Hosterman said.
Furthermore, the FHA does not allow for any excess fees to be charged in the streamline refinance program. “The client’s current loan balance may not be increased to cover loan costs,” he said. “The FHA mandates a formula for streamline refinances, where the consumer’s new loan cannot exceed their existing principal balance, plus upfront mortgage insurance premiums.”
Benefits of FHA Streamline Refinance loans
Being able to save time and money is a major benefit to getting an FHA Streamline Refinance loan. Here are some other advantages to consider.
- No credit check: If your credit score has gone down since you qualified for your original FHA loan, you will not be penalized for this in your application, as a second credit check will not be required.
- No employment or income verification: Any changes to your income or employment situation will not affect your eligibility for refinancing because no documentation of either is requested.
- No appraisal required: If your home has gone down in value, your application won’t be affected. Not having to provide an appraisal will also save you around $400, said David Reischer, a real estate attorney and CEO of LegalAdvice.com who is based in New York.
“There is really no extra protection afforded to a homeowner by having an appraisal on a refinance, since they already own the property,” he said. “Unlike a purchase mortgage, which requires negotiating the purchase price, which must also be in line with the assessment determined in the appraisal, a lender can do an automated appraisal on a streamline refinance to determine whether there’s sufficient equity in the property.”
- Lower interest rate: In a low-interest-rate environment, refinancing can secure rates that are lower than when you first took out your FHA loan. However, if you’re looking to refinance in a rising interest rate environment, as we’re now experiencing, choose a lender that will guarantee the interest rate for 60 days, which is the typical length of time needed to process and underwrite a loan.
This “locks in” the interest rate, said Reischer, who added that in some instances, a 90-day lock is necessary if the lender ends up taking longer to process the loan. “I have worked with many brokers that are always scrambling to make sure that rate locks hold to the funding date,” he said. “It is not uncommon to have to extend a rate lock several times to reach the actual date a loan eventually closes.”
FHA Streamline Refinance program limitations
Although the FHA Streamline Refinance program makes sense for some borrowers, there are certain exceptions. Consider the following limitations to decide whether it’s a good option for you.
Must have a current FHA mortgage
To be eligible for the FHA Streamline Refinance program, you must already have qualified for, and received, an FHA mortgage.
Must be up to date
You must demonstrate at least one year of on-time payment history for your loan, and you cannot be behind on payments at the time of application.
Must demonstrate net tangible benefit
According to the 2009 Federal Mortgage Reform and Anti-Predatory Lending Act, there must be a good reason for a lender to refinance a borrower. In other words, there must be a tangible net benefit for the borrower.
So how can you demonstrate this is the case? One way is by showing there’s an opportunity to reduce the term of your mortgage, Hosterman said. “For instance, if a client goes from a 30-year fixed loan to a 15-year fixed loan, this would present a net benefit as defined by the FHA,” he said.
”Another net benefit is when the client saves a minimum of $50 a month in relationship to their principal, interest and mortgage insurance costs.”
Cash-out refinancing not eligible
The option of a cash-out refinance, typically intended to turn the equity in your home into cash you can borrow at lower interest rates, is not possible with the FHA Streamline Refinance program. The most cash you’ll be able to draw out is $500.
Another downside of the FHA Streamline Refinance program is that closing costs cannot be rolled into the loan, Reischer said. While those costs may vary between lenders, they typically range from $4,000 to $6,000 and can include attorney’s fees, title insurance and fees for processing, underwriting and flood certification. These are unavoidable on an FHA Streamline Refinance, and need to be paid upfront, Reischer said. “A borrower must show up at the closing table with funds to cover all the closing costs.”
Another hidden cost that always surprises people involves origination fees charged by the lender to cover the processing costs of the loan. While it is usually an unnecessary fee that can be negotiated or even removed entirely, it can add up to as much as 1% to 2% of the total loan amount. “It is a very expensive fee that can easily balloon closing costs beyond the typical FHA Streamline Refinance,” Reischer said.
Points to remember
Consider all the pros and cons of the FHA Streamline Refinance program to decide whether it is right for you. The key determining factor lies in whether you can get a lower interest rate than on your current loan or reduce the length of your mortgage.
Determine the costs associated with the refinance, whether you can part with the cash to pay them upfront and if they’re outweighed enough by long-term savings to proceed.
If not, the FHA streamline may not be your most advantageous option, Hosterman said.
“I had a client who called me to inquire about an FHA streamline but had a lot of credit card debt at high interest rates,” he said. ”After running the numbers, we discovered that while an FHA Streamline loan saved her $125 a month, a debt consolidation loan saved her about $950 a month on overall monthly cash flow.”
Hosterman recommends chatting with a trusted mortgage professional to discuss all the options available to you and ways you can secure good interest rates. “Depending on the market conditions, rates can sometimes change multiple times a day,” he said.
“The 10-year Treasury has traditionally been a great indication as to what is happening – if it increases, interest rates will typically go up as well.”
You can compare FHA loan rates here.
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