Everything You Need to Know about FHA Streamline Refinance

The FHA streamline refinance program offers a faster and more cost-effective way for borrowers with a Federal Housing Administration (FHA)-insured mortgage to refinance at lower rates. This type of refinance is generally simpler to obtain than traditional refinances, making it a good option for those facing financial difficulties. However, it’s important to be aware of its key limitations.

Here’s what you need to know about securing an FHA streamline refinance.

What is an FHA streamline refinance?

An FHA streamline refinance is a specialized refinance loan available to borrowers with an existing FHA loan. This process involves obtaining a new mortgage to pay off your current one. The term “streamline” refers to the simplified application process, which is generally easier than a standard refinance. For instance, it often doesn’t require a home appraisal.

How does an FHA streamline refinance work?

The FHA streamline program offers two types of refinances: non-credit qualifying and credit-qualifying. Both aim to reduce your monthly principal and interest payments on an FHA-insured mortgage.

Credit-qualifying streamline refinances involve the lender verifying your income, checking your credit, and confirming your debt-to-income ratio. The FHA mandates a credit-qualifying streamline in certain situations, such as when the refinance could lower the mortgage payment by more than 20 percent.

Non-credit qualifying refinances do not require these verification steps, making the process more straightforward. However, while the FHA itself does not mandate a credit check, your lender may still review your credit report.

FHA streamline eligibility guidelines

The FHA streamline refinance program offers more lenient guidelines compared to traditional refinances, especially regarding appraisals, credit checks, and income verification. However, it still has certain eligibility requirements, which can vary by lender. Here are the minimum standards:

1. You must refinance an FHA loan

To qualify for the FHA streamline program, you must already have an FHA-insured mortgage. This is a fundamental requirement of the program.

2. You must receive a ‘net tangible benefit’

Your refinance must result in a “net tangible benefit” for you as the borrower. Acceptable benefits include:

• A reduction of at least 0.5 percent in your fixed-rate mortgage payment (including the mortgage insurance premium).
• Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
• Shortening or extending the loan term to adjust payments.

For ARMs, additional conditions apply. For instance, when refinancing a one-year ARM to a fixed-rate loan, the new rate cannot exceed the current ARM rate by more than two percentage points. Conversely, refinancing a fixed-rate loan to a one-year ARM requires the new rate to be at least two percentage points lower.

3. You can only apply after a waiting period

You cannot apply for a streamline refinance immediately after your FHA loan closes. You must wait until:

• You have made at least six on-time payments.
• Six months have passed since your first payment due date.
• 210 days have elapsed since your FHA loan closed.

4. You must have a history of on-time payments

If your FHA loan is less than a year old, all payments must have been made on time. For loans older than a year, you may have one 30-day late payment within the past six months, provided that all payments in the three months leading up to your refinance application were on time.

5. You must pay mortgage insurance premiums

As with all FHA loans, FHA streamline refinances require mortgage insurance premiums (MIP). This includes:

• Upfront MIP: 1.75 percent of the loan amount.
• Annual MIP: Ranges from 0.15 percent to 0.75 percent based on the loan amount, LTV ratio, and loan term.

Depending on when you obtained your original FHA loan, you may be eligible for a partial refund of the upfront MIP when refinancing. This refund can help offset the cost of the MIP on your new loan.

Pros and cons of FHA streamline refinances

Pros

• No Credit Check: A low credit score typically won’t prevent you from refinancing through the FHA streamline program.
• No Income Verification: Unlike conventional refinancing, you don’t need to provide proof of income, reducing paperwork and hassle.
• No Appraisal Required: The refinance loan amount is based on your current mortgage balance, not your home’s current value, which is advantageous if you’re in a negative equity situation.
• Faster Closing Time: Streamline refinances are processed more quickly due to the simplified underwriting process.

Cons

• Exclusive to FHA Loans: The program is only available for borrowers with existing FHA-insured mortgages; those with conventional or other types of loans are ineligible.
• Strict Eligibility Requirements: The new loan must offer a “net tangible benefit,” such as a specified reduction in your interest rate.
• Additional Mortgage Insurance: You will need to pay the upfront mortgage insurance premium (MIP) again with each refinance.
• No Cash-Out Option: You cannot take out extra cash with a streamline refinance; the new loan amount is limited to the balance of your existing mortgage.

What are FHA streamline refinance rates today?

FHA refinance rates are generally competitive with rates for other loan types. To understand how changing your rate or adjusting the length of your loan term might affect your monthly payment and overall interest costs, consider using a mortgage refinance calculator.

How to apply for an FHA streamline refinance

• Check Your Credit: Before applying for a new loan, it’s wise to review your credit reports and scores. While the FHA doesn’t always require a credit check for non-credit qualifying streamline refinances, some lenders may still conduct one. If your credit needs improvement, use this time to enhance your score, which could help you secure a better rate.
• Find an FHA-Approved Lender: Though you can return to your current FHA lender, shopping around can be beneficial as rates differ between lenders. Many lenders offer FHA loans, including streamline refinances. Explore options and compare rates to find the best fit for your needs.
• Prepare for the Application: While an FHA streamline refinance requires fewer documents than a traditional refinance, you’ll still need to provide some information about your mortgage and financial situation. Be ready to supply documents such as your current mortgage statement and homeowners insurance policy.