Refinancing your home loan is an excellent way to reduce the duration of your mortgage, decrease costs and decrease your interest rate. Generally refinancing is seen as stressful, usually requires the candidate to handle lots of paperwork and meet specific credit requirements while possessing a good amount of home equity. Many borrowers find that they aren’t able to refinance despite having strong economic health, due to their properties value sinking. Despite this, if you possess an FHA mortgage, there is a better, more enjoyable way to refinance. Using an FHA Streamline Refinance, you can streamline your refinance and acquire a new mortgage with fewer steps and less work.
Overview of the FHA Streamline Refinance Program
Prior to proceeding with an FHA Streamline Refinance option, it’s imperative you comprehend the way this program works.
To start, an FHA Streamline Refinance involves refinancing a preexisting FHA-insured mortgage with the advantage of restricted underwriting and relaxed credit necessities.
FHA Streamline Refinances are reserved for those already possessing an FHA mortgage. FHA mortgage insurance backs these loans.
Since the initial mortgage is already FHA-insured, less documentation is necessary to close, and your credit score is viewed with less scrutiny. Because you already met the requirements for an FHA loan, FHA Streamline Refinancing places less analysis on the buyer.
When all is said and done, these types of loans are for those who may prosper from acquiring a new mortgage for any number of reasons, usually because it diminishes their payments.
If a new mortgage will assist the owner in staying up-to-date on their payments, while remaining in their household, then an FHA Streamline Refinance is viewed as a success for all involved.
How to qualify
Being eligible for an FHA Streamline Refinance is very easy:
- An FHA loan must already be in your possession.
- You must be up-to-date on your mortgage. You will not be eligible for an FHA Streamline Refinance if you fall behind on monthly payments.
- The borrower must be receiving some sort of benefit from the new mortgage in order to proceed with this refinance. The new loan could be beneficial to you in any number of ways. Lower monthly payments or interest rates are the most common. This could even mean switching from an adjustable-rate mortgage to a fixed-rate one.
- The FHA Streamline Refinancing process won’t allow you to take out cash during your refinance. $500 is the maximum amount cash you’ll receive during your refinance.
- Finally, this option is only applicable once your original loan is a minimum of 210 days old. Therefore, you will not be able to immediately refinance an FHA mortgage into a new mortgage.
If you possess a new FHA loan and interest rates decrease after closing, this financial application will not be available to you for roughly seven months.
Benefits of an FHA Streamline Refinance
If the thought of refinancing your FHA mortgage entices you, it’s most likely because you'll prosper to some extent. These are a few of the advantages to consider while choosing to proceed with an FHA Streamline refinance:
- No credit check. Because you previously qualified for the first FHA loan, FHA Streamline Refinancing might not require you to perform a second credit check. This could be helpful if your credit score has dropped.
- No occupation or proof of income. If your occupation or income has shifted since you took out your first mortgage, your refinance will not be affected.
- No appraisal necessary. So a drop in your home’s value will not ruin your chances of refinance.
- Low or no closing costs. FHA Streamline Refinancing allows for the same low closing costs as other FHA home loans. It's even possible to acquire a “no cost” FHA Streamline Refinance as long as you’re okay with paying a greater interest rate. Using this type of refinance, the lender will depend on money from your increased interest rate to cover the cost of closing Remember to keep in mind that the FHA does not let lenders wrap the cost of closing your refinance into the new mortgage.
- Decreased interest rates. If interest rates have dropped since you took out your first FHA mortgage, then refinancing with an FHA Streamline Refinance could help you achieve a decreased interest rate. Generally, this will decrease your monthly payment causing smaller interest costs during the time of your mortgage.
Limitations of an FHA Streamline Refinance
Although FHA loans may seem like the right option, this application does have some limitations and restrictions:
- A previous FHA mortgage is required. You need to have an FHA home loan to be eligible for an FHA Streamline Refinance. If you do not possess an FHA home loan, this option is not for you.
- You must make your monthly payments on time. HUD.gov states that you must be current on your monthly mortgage payments in order to be eligible. If you're delinquent on your loans, you don't qualify for this option.
- A net tangible benefit that comes from refinancing is essential for you getting approved. Either your repayment timeline will be reduced, or you'll save money on interest costs.
- Cash-out refinances are not an option. Although it is possible to do a cash-out refinance if you select a separate refinancing program, using an FHA Streamline Refinance, you will not be able to take more than $500 out in cash. Simply put, you can't use this program to refinance another loan while keeping the difference.
Is an FHA Streamline Refinance the right choice?
Refinancing your FHA mortgage is a very personal decision.
You might be wondering why one would go through the course of acquiring an additional mortgage. Typically, there are two big factors in determining if an FHA Streamline refinance is a good choice: Are you getting a lower rate, and are you shortening the duration of your mortgage?
The net tangible benefit test is met if:
- You shorten the length of your mortgage
- Your new interest rates don't surpass your current one
- The combined MIP, principal and interest payment of the new mortgage does not surpass the combined MIP, principal and interest of the new mortgage by more than $50
In other words, you can use an FHA Streamline Refinance to shorten the duration of your mortgage provided your interest rate fails to increase and your total loan payment doesn't increase by more than $50.
Note: refinancing replaces your existing mortgage with a new loan - so while you may be reducing your monthly payment, it is possible to end up paying more interest over the course of the loan if the loan term is the same.