What is the FHA Streamline Refinance Loan?
The FHA offers a specialty loan program that provides homeowners with a simplified, low cost refinancing option when moving from one FHA loan into a new one. The FHA Streamline Refinance requires much less documentation when compared to a standard purchase or refinance mortgage, has a less rigorous underwriting process, and offers reduced fees as well.
By removing many of the barriers to refinancing, the goal is to encourage more mortgage holders to take advantage of lower mortgage rates, to move from an adjustable rate loan to the long term security of a fixed rate mortgage, or other beneficial changes. This will likely make it even easier for consumers to stay current with their mortgage payments, potentially free up funds for other purposes, and lead to greater financial stability and successful home ownership for many years to come.
FHA Streamline Basics
- Credit Qualifying and Non-Credit Qualifying Options.
- Used to refinance one FHA home loan into another.
- The borrower must benefit from the transaction.
- The maximum cash out is $500.
- 10 year, 15 year, 20 year, 25 year, and 30 year term options.
- Fixed rate or 5/1 Hybrid ARM (Fixed rate only for non-owner occupied).
- 1 -2 Unit Primary Residence or Investment, FHA HRAP Approved Condos, Manufactured Homes, and PUDs.
What are the benefits?
One thing that holds many people back from refinancing, even when they could realize substantial savings, is that they think the process will be cumbersome and time consuming. FHA mortgage holders aren’t always aware that there is a simplified option that could allow them to refinance into a lower rate mortgage with much less effort and time commitment than they expect. Reduced documentation means less chasing down bank statements and sourcing deposits.
If a borrower qualifies for a non-credit qualifying FHA Streamline Refinance they may not even need to have credit checked or employment verified.
Because the process is less complex it also takes less time and resources on the part of the lender. There may be no appraisal required, no credit verification, and other aspects of a traditional mortgage application eliminated. This eliminates fees as well – making it a much less costly transaction than a typical purchase or refinance home loan. The reduced expenses help homeowners start to see the financial benefit of their new loan even sooner.
Who is eligible for an FHA Streamline Mortgage?
In order to qualify for the FHA Streamline homeowners must already have an FHA loan in place on the subject property. Some of the additional requirements include:
- At least six payments must have been made on the FHA loan that will be refinanced.
- A minimum of six full months must have passed since the due date of the first payment on the FHA loan that will be refinanced.
- The FHA loan to be refinanced must have closed at least 210 days earlier.
- The borrower cannot be behind on payments on the current loan.
- There must be a “net tangible benefit” to the borrower to complete the transaction.
In which scenarios is the FHA Streamline Refinance useful?
A homeowner with an existing FHA loan that has a higher rate than current mortgage rates may be in a perfect situation to benefit from the Streamline Refinance option. It may be possible for them to lower their monthly payment while avoiding some of the work involved in a traditional mortgage transaction and with lower fees.
A lower mortgage payment can free up funds for other purposes such as a short term emergency fund, long term savings for retirement or education, other investments, or simple to make it easier to pay for monthly expenses.
Homeowners can also choose to continue to pay the higher payment they are used to, with the additional amount going to principal each month. Over time, even a small additional payment can greatly reduce the amount of interest paid over the life of the loan, and even shave months or years off of the repayment term.
What if clients are interested in taking advantage of the lower mortgage rate but don’t want to start over with a 30 year mortgage after making several years of mortgage payments? A shorter term loan with a 25, 20, or 15 year repayment period could be a great fit. It might mean additional interest savings as well, as shorter term mortgages often come with lower interest rates when compared to 30 year loans.
Even if current interest rates aren’t dramatically lower than that of a homeowner’s existing mortgage they may still have reason to refinance. For example, if nearing the end of the fixed rate period on an adjustable rate loan they may choose to refinance into a fixed rate mortgage, rather than subject themselves to the uncertainty of potential rate increases in the future.
Understanding the Net Tangible Benefit
One of the requirements of the FHA Streamline Refinance is that there must be a “net tangible benefit” to the borrower. This prevents unscrupulous mortgage professionals from encouraging a homeowner to refinance repeatedly even if there is no sound financial reason to do so.
A few of the ways a new loan can benefit the borrower include:
- Reduce the interest rate of a fixed rate loan by 0.5 percent or more. (If paying off both a first mortgage and second mortgage or home equity line of credit with the new loan it is the combined interest rate that is examined).
- Move from an adjustable rate loan to a fixed rate, with an interest rate not more than 2 percent higher.
- Shorten the amortization period. (Move from a 30 year fixed rate mortgage to a 15 or 10 year loan term).
Can you purchase a home with an FHA Streamline Refinance?
This is a refinance only program, and cannot be used to buy a new home.
Refinancing with the FHA Streamline Home Loan
Created to allow simplified refinancing from one FHA mortgage into a new one, this can be an ideal option for many FHA home loan holders.
Other Programs to Consider
If the FHA Streamline is not a great fit for a specific scenario here are a few other products to explore:
- To purchase a home or take a large amount of cash out through a refinance: FHA 203(b)
- To finance home improvements or renovations: FHA Standard 203(k) Rehabilitation Loan
- Streamlined refinance option for those with VA eligibility: VA Interest Rate Reduction Refinance Loan (IRRRL)