The Federal Housing Authority (FHA) does more than offer ways for people to buy a home. They have another program designed to allow homeowners to get a lower interest rate, and hopefully a lower payment, without going through all the normal work associated with a refinance. The program is called the FHA Streamline Refinance and it can be a real boost to many homeowners all across the country.
Who is Allowed to Apply for the Program?
A homeowner that currently has an FHA mortgage can apply for the streamline refinance program. However, there is a major pre-requisite. Homeowners must be current on their mortgage payment and have a solid history of making their payments on time.
Specifically, borrowers are not allowed to have more than one payment that was over 30 days past due if the loan is more than one year old.
What if you have more than one late payment? Simple. Just make the next 12 payments on time, each and every month, to rebuild your credit with FHA.
FHA also states that a person who is applying for the streamline refinance must receive an actual benefit from the transaction. For this reason, the new loan interest rate must be at a minimum of 0.5% lower than the previous rate in order to be approved.
The Streamline Refinance loan has multiple advantages designed to help the borrower improve their financial outlook. Here are some of the top reasons to consider this type of loan:
- Attractive Interest rate
- Appraisal not necessary
- You could get a refund of a portion of the upfront MIP that was paid when you received your original FHA loan
- Proof of income is not required
- Quick loans to process, which means they are quick to close
Since the loan program does not specifically call for a new appraisal, it is possible that people who have lost value in their homes can use the streamline refinance to lower their payments while they wait for the local market to rebound.
Costs of Closing the FHA Loan
If there is a downside to the streamline refinance, it would be the closing costs. The costs to close the loan are quite similar to the items associated with the original home purchase. Things like title insurance, mortgage recording fees, home owner’s insurance, property taxes and all of the other items that are a normal part of buying a home will also be charged for the refinance.
The major difference is that most FHA Streamline Refinance loans do not charge for a new appraisal.
Paying Closing Costs or Financing the Costs
With a streamline refinance loan, the closing costs must be paid by the borrower from their own funds. This means the borrower may pay a few thousand dollars for the ability to save money in the future in the form of less interest.
There is a way to add the closing costs to the loan. If the borrower chooses to get a new appraisal, FHA will allow the costs to be added to the new mortgage. However, this only applies if the home has sufficient equity to cover the additional costs. This point will need to be discussed at length with your lender before making a decision on ordering a new appraisal.
Lender Credits are also Allowed
FHA will also allow for lender credits to help with some of the closing costs. It is possible for the lender to charge a slightly higher interest rate to the borrower in exchange for the borrower using some of the revenue to cover the closing costs. This is a negotiation that is done on a case by case basis based on the borrower’s needs and the specific lender.
Seasoning Period for FHA Loans
Even though interest rates may drop within a month or two after a borrower has signed a new FHA loan, there is a seasoning period. The rules state that
- The mortgage closed a minimum of 210 days ago
- Your first payment came due 6 months ago, (or longer)
- You made the first 6 payments on time with the mortgage
Here is an example to help make sense of the rules. Suppose a person bought a home and signed all the final documents on April 24, 2019. They moved in the home within the next week. Their first payment came due on June 1, 2019. That borrower would be eligible to apply for the streamline refinance on December 29, 2019.
Maximum Loan Amount
When calculating the maximum new loan amount under a streamline refinance, the FHA guidelines will allow for the following
- The current principal amount of the outstanding FHA loan
- The upfront mortgage insurance calculated on the new loan
- Interest for one month’s home payment
- If you are expecting a refund from the mortgage insurance paid upfront on the original loan, that amount may be subtracted to reduce the overall loan amount.
Refund of Mortgage Insurance
It is possible that you will be entitled to get a portion of the upfront mortgage insurance fee paid when the original FHA loan was closed. The refund is based on the time that has passed between the closing of the original loan and the closing of the streamline refinance loan.
The refund is only available for 36 months after the original loan closes. The amount will decrease for each month that passes. Therefore, if you were to refinance 26 months after closing the original loan, the refund amount would be smaller compared to if you had refinanced 14 months after the original loan.
Documents Needed for Streamline Refinance
Since the loan is called a streamline, the goal was to reduce the number of documents and paperwork needed to close the loan. The following checklist represents the most common items that you will need to present to your lender
- A most recent statement from your mortgage holder
- Copy of either the HUD-1 from your loan closing or copy of the Deed of Trust that reflects the case number assigned by FHA to your mortgage
- Most recent statements covering the last 60 days from your checking/savings accounts. This is to determine that you have enough income to cover the closing costs
- A copy of the mortgage note for your existing home loan
- Contact information for your current employer to verify your employment status
- Proof of homeowner’s insurance
Please make sure to keep making all payments on time to all your creditors, especially for your mortgage.
Determining the Benefit to the Borrower
FHA is very clear on the fact that the new mortgage must be of financial help to the borrower. The guidelines spell out that the borrower’s combined rate, which accounts for the private mortgage insurance, must be at least 0.5% less than the previous rate.
For example, a borrower may have an FHA mortgage loan originated a few years ago when the mortgage insurance premium was higher and rates had moved up. If the borrower is paying 5.00% interest rate and 1.35% in mortgage insurance premiums, their combined rate is 6.35%. If the customer is approved today for a streamline refinance with an interest rate of 4.625% and mortgage insurance rate of 0.85%, their combined percentage has dropped to 5.475% which would satisfy the guideline requirements.
|Type of Refinance||Required Benefit|
|Fixed rate loan to one-year adjustable-rate loan||The new combined rate has to be at least 2% lower|
|Fixed rate loan refinanced to Hybrid||The new combined rate has to be at least 2% lower|
|Adjustable Rate loan to a fixed rate loan if current loan has less than 15 months left on a fixed period||The combined rate may be higher, but not allowed to be more than 2% higher|
|Adjustable Rate loan to a new one year ARM if current loan has less than 15 months left on a fixed period||The new combined rate has to be at least 1% lower|
|Adjustable Rate loan to a new Hybrid if current loan has less than 15 months left on a fixed period||The new combined rate has to be at least 1% lower|
|Adjustable Rate loan to a new one year ARM if current loan has MORE than 15 months left on a fixed period||The new combined rate has to be at least 2% lower|
|Adjustable Rate loan to a new Hybrid if current loan has MORE than 15 months left on a fixed period||The new combined rate has to be at least 1% lower|
Cash-Out Not Allowed
One of the distinguishing factors of the streamline refinance is that the loan is intended only to refinance the current mortgage and nothing else. This means the loan does not allow borrowers to tap into the equity in their home and get cash for any reason. Although a customer may receive cash at closing due to overestimating closing charges, the amount is typically less than $500.
Existing Condos May be Eligible
Although many condominium developments have lost their FHA approval over the last few years, there are still some condo owners that have an existing FHA loan. If you have an FHA mortgage on a condo, you may be able to refinance using the streamline option. However, keep in mind, that if you choose to order an appraisal, the condo complex will have to meet the current FHA guidelines.
Common questions about an FHA Streamline Refinance
Listed below are some common questions and corresponding answers about the FHA streamline refinance program.
- Is it possible to either add a borrower or remove a borrower with the Streamline Refinance?
It is possible to remove one borrower so long as one of the original borrowers remains on the loan. In the case of adding a borrower, that will depend on the lender.
- Will the streamline refinance allow me to move from a 30-year fixed loan to either a 15 or 10-year fixed loan?
This is not allowed with the streamline refinance. Borrowers will need to speak with their lender about using a normal refinance
- Can an FHA 203k loan be refinanced with the Streamline Refinance program?
As long as all work is completed, and the seasoning requirements have been met, then the streamline refinance is an option. The lender may wish to see proof that the work is completed by asking for a certificate of occupancy, or a closing statement of the escrow account, or some other documentation.
- Will FHA allow me to refinance an investment property or a second home?
This will depend mainly on the lender. While FHA will allow a streamline refinance on a property as long as there is an existing FHA mortgage, the lender may not. This comes down to the discretion of the lender and how their internal rules are set up.
- Will FHA require me to make major repairs if my home is in terrible condition?
As long as you do not order a new appraisal, FHA will not require any repairs on the home prior to closing.
People have long enjoyed the many advantages of working with FHA approved lenders for buying a first home or refinancing to get money for other reasons. The streamline refinance is yet another example of how FHA is committed to helping borrowers improve their financial standing while helping achieve the goals of homeownership.