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For low- to moderate-income home buyers, FHA loans are a godsend. Because these loans are backed by the U.S. Federal Housing Administration, lenders can safely work with borrowers who would be ineligible for a conventional mortgage.
As your financial situation changes, though, you may be able to get a lower monthly payment as you pay off your home loan. An FHA streamline refinance could help you get it.
This guide will walk you through the details of an FHA streamline refinance: how it works, what type of borrower it’s best for, how to meet the requirements, and more.
In this guide:
- What is an FHA streamline refinance?
- Pros & cons of the FHA streamline program
- FHA streamline refinance guidelines & requirements
- What’s not required by the FHA streamline program?
- FHA streamline insurance requirements
- Where to get an FHA streamline refinance loan
- Frequently asked questions
What is an FHA streamline refinance?
An FHA streamline refinance loan is a way to refinance an FHA loan into a new mortgage with better loan terms. It requires less paperwork and documentation than other refinance options, which makes the process easier.
Borrowers can use an FHA streamline refinance to get a lower monthly payment with an extended repayment term or a lower interest rate. Unlike conventional cash-out refinance loans, borrowers can’t cash out more than $500 from the refinance loan, no matter their current home equity ratio.
Pros & cons of the FHA streamline program
- No home appraisal necessary: A borrower may request an appraisal if they like, but it’s not necessary. This can be beneficial if your home value is less than your mortgage balance.
- No loan-to-value requirement: Lenders can’t require a certain LTV ratio before refinancing the loan. Borrowers whose house has dropped in value can still refinance their loan to get a better interest rate or monthly payment.
- Faster process: Because the FHA streamline process requires fewer documents and less paperwork, borrowers don’t have to wait as long. This shorter process means they could get a cash boost sooner than with a conventional refinance loan.
- Fewer credit and income requirements: Most conventional loan refinances require a minimum credit score or income. But as with FHA loan requirements, FHA streamline refinance requirements are more lenient. Lenders may not even ask to verify your credit history or income to approve the loan.
- Limited cash-out option: If you have a lot of equity in your home, you may want to cash out some to use for a home remodel, vacation, or other expense. FHA streamline mortgages don’t allow borrowers to cash out more than $500, but you could instead consider an FHA cash-out refinance.
- Only available for FHA loan borrowers: You can’t refinance a conventional mortgage with an FHA streamline refinance. Borrowers can only refinance an FHA loan with this program.
- Must have a net tangible benefit: Borrowers must prove they will see a 5% decrease in their monthly payment. If your interest rate is already low, it may be hard to achieve that 5% decrease. Borrowers with an adjustable-rate mortgage may be exempt from this rule if they refinance to a fixed-rate loan.
- You have to pay upfront mortgage insurance premium again: Refinancing with an FHA streamline mortgage resets the mortgage, so you have to cover the 1.75% FHA MIP fee again. You may be able to roll this into the mortgage, but you’d pay interest on that amount.
FHA streamline refinance guidelines & requirements
There are some requirements the borrower must fulfill to be eligible for an FHA streamline refinance.
- You must already have an FHA loan. You can’t refinance a conventional mortgage or other first-time home buyer loans, such as a USDA loan or loan from a VA lender.
- The loan must be at least 210 days old with at least six months’ worth of payments made.
- You must be current on your loan and can’t have had any late or missed payments in the last three months. There can only be one 30-day late payment in the previous six months.
- There must be a net tangible benefit.
What is a net tangible benefit?
The net tangible benefit is a requirement for borrowers interested in an FHA streamline refinance. It means the new loan needs to be financially beneficial for the borrower. It almost always has to reduce your monthly payment by 5% or more through a lower interest rate or longer loan term.
Borrowers with an adjustable-rate mortgage (ARM) may also qualify as long as you’re past the fixed-rate period. If you have a fixed-rate mortgage, you may refinance to a one-year ARM as long as the interest rate is two points less than the original fixed rate.
Your current mortgage lender may be able to show whether a streamline refinance will result in a net tangible benefit for your loan.
What’s not required by the FHA streamline program?
The FHA streamline program doesn’t have any income requirements, which may be useful for borrowers whose salary has recently decreased.
Also, home appraisals are optional, meaning there’s no minimum home value or LTV requirement. Compare that with conventional refinance loans, which usually require the appraisal to meet a certain amount.
FHA streamline insurance requirements
When you took out an FHA loan, you had to pay an upfront mortgage insurance premium (MIP) that cost 1.75% of your mortgage. When you refinance your mortgage with an FHA streamline refinance, you have to pay that upfront fee again.
You may be able to get some of that fee refunded if you closed on the loan 36 months ago or less.
The refund amount ranges between 10% to 80% and decreases with every passing month. For example, a borrower who closed 12 months ago may receive a 58% refund, but someone who closed 24 months ago will only get 34%.
|Months since closing||MIP refund||Months since closing||MIP refund||Months since closing||MIP refund|
You won’t receive the refund as cash. Instead, it counts toward the new monthly MIP fee. If you put down at least 10% on the loan, you only have to pay MIP for 11 years.
Who does an FHA streamline refi make sense for?
An FHA streamline refinance makes the most sense for people who have less than 20% equity in their home.
When you have more than 20% equity, you can refinance an FHA loan into a conventional mortgage. Your mortgage payments will likely be lower with this option because you won’t have to pay a monthly mortgage insurance premium.
Where to get an FHA streamline refinance loan
Many mortgage lenders are authorized to participate in the FHA streamline program, but our guide to the best FHA lenders is a good place to start your search.
Each lender can make its own streamline refinance offer. Some may provide a better deal on closing costs, while others will have a lower interest rate. You can find the best deal by shopping around and asking lenders to match the best offer.
You can aslo ask your current FHA lender if it can match an FHA streamline quote you receive.
Also, remember to get quotes from multiple lenders within a two-week period to protect your credit score from multiple credit inquiries.
Frequently asked questions
An FHA streamline refinance is similar to other types of refinancing, but it’s backed by the federal government, and borrowers have less paperwork to fill out and submit.
One major downside to using an FHA streamline refinance is that borrowers can’t roll all the closing costs into the mortgage. They’re required to pay closing costs when they refinance, no matter the amount.
You could find a lender that offers a higher interest rate in exchange for no closing costs. This may cost more in the long run, but can be useful if you don’t have much liquid cash.
Closing costs vary among lenders. Your current bank may give you a discount for being a loyal customer, while other lenders may provide a special offer for moving your mortgage to them. Compare closing costs before choosing a lender.
You can use an FHA streamline refinance if the property is an investment property, according to the FDIC. The same rules apply: The mortgage must already be an FHA loan, you must be current on the loan, and there must be a net tangible benefit.
You can also use an FHA streamline refinance if the property is your second home or a primary home that has up to three other units.
If your equity has improved or the home’s value has increased, you may be able to cash out some equity with a refinance loan. You can use this cash for anything, such as paying for a child’s college tuition, buying a second house, or saving for a rainy day.
This isn’t an option with an FHA streamline refinance, but there is an FHA cash-out refinance program for borrowers with more than 20% equity in the home.
The cash-out refinance option has credit score and income requirements. You may need a minimum credit score of 600 and a low debt-to-income ratio to qualify.
Once a borrower decides to refinance a mortgage loan, they need to pick which kind of refinance option they want. Those who have an FHA loan can decide between an FHA mortgage refinance and a conventional mortgage refinance.
The best way to compare these options is to contact several lenders and get quotes from each. Look at the differences between the monthly payment, any extra fees, and the total interest rate to find the one that works best for your situation.
Author: Zina Kumok