When it comes to refinancing your mortgage, the process can become quite tedious, thanks to all the paperwork involved. That’s why many homeowners turn to the FHA Streamline Refinance program. As the name implies, this mortgage product seeks to simplify the application process, something many homeowners find very appealing.
A quick overview
In simple terms, the Federal Housing Administration (FHA) Streamline Refinance Program allows homeowners to refinance their existing FHA mortgage in an effort to reduce their current interest rate while avoiding much of the paperwork, including a home appraisal, that accompanies a traditional mortgage refinance application.
As Tendayi Kapfidze, chief economist for LendingTree, the parent company of MagnifyMoney, put it, the FHA Streamline Refinance program makes the loan underwriting process for a new mortgage less cumbersome. “It’s not necessarily a different type of loan,” he said. “It’s really about the process of how the loan gets done.”
Therefore, choosing the FHA Streamline Refinance program should be an easy choice, right? Well, yes and no. As with all mortgage products, there are pros and cons to this program, all of which should be thoughtfully evaluated and thoroughly discussed with your financial planner before moving forward.
Benefits of FHA Streamline Refinance loans
Most of the benefits of the FHA Streamline Refinance program revolve around the streamlined application process for the mortgage loan. For example, because your existing mortgage must be an FHA loan, you have already established your creditworthiness for a new FHA mortgage. As a result, there’s no need to run a check on your credit history or provide employment or income verification. “What they are saying is they already have your information,” Kapfidze said.
Homeowners looking to refinance under the FHA Streamline Refinance program may not need a new appraisal on their home, either. Because the new mortgage amount cannot exceed the amount of the original mortgage, there’s no need to prove the home’s value again. Not having to pay for an appraisal as you would with a traditional refinance mortgage product reduces the costs associated with a Streamline Refinance mortgage, another factor that makes this product attractive.
In addition to less paperwork, an FHA Streamline Refinance offers tangible benefits as well. The primary tangible benefit is a lower interest rate, which could reduce the amount of your monthly payments. As with any mortgage product, this rate may be fixed or adjustable.
Also, when using the FHA Streamline Refinance program, there may be lower closing costs than those associated with a traditional mortgage product. It’s important to note these closing costs must be paid separately from the mortgage amount. Unlike traditional mortgages that allow borrowers to roll closing costs into the mortgage amount, the FHA does not permit lenders to do the same with a Streamline Refinance.
However, some lenders may offer products that work around this exclusion by charging a higher interest rate and using those monies to pay the closing costs on the transaction. Therefore, the borrower would incur “no costs” at the onset of the Streamline Refinance mortgage.
Limitations of FHA Streamline Refinance loans
While the FHA Streamline Refinance program seems like a win-win for everyone, it’s actually not for all. There are certain requirements in place that limit eligibility for taking advantage of this mortgage product.
First and foremost, the original mortgage must already be an existing FHA home loan. Having an FHA-insured loan in place is the primary reason why you can usually skip a credit check, income and employment verification, along with the home appraisal.
Second, you must be current on your existing mortgage payments and ideally should not have missed any payments. Your mortgage must be at least 210 days old and you must have made at least six monthly payments. Exceptions can be made if, for example, you’ve had your loan for less than 12 months and haven’t missed any payment deadlines by more than 30 days.
Third, through the program, the FHA requires that the Streamline Refinance provides the borrower with a “net tangible benefit.” The definition of this “net tangible benefit” will not be the same for every homeowner because it varies by type of loan, interest rate, mortgage amount and term of the loan.
When discussing the FHA Streamline Refinance Program with your lender, make sure you both determine what the net tangible benefit is for you so you can make an informed decision on this product before moving forward.
Also, unlike a traditional cash-out refinance mortgage, homeowners using the FHA Streamline Refinance program cannot receive extra cash from the loan to use for expenses like home renovations, college tuition and paying off credit cards. In fact, borrowers are prohibited from taking more than $500 out of mortgages in this program.
FHA Streamline Refinance mortgage insurance requirements
Because the FHA Streamline Refinance program is an FHA-insured mortgage, meaning the FHA will pay the loan if the homeowner defaults, homeowners are required to carry mortgage insurance on this loan, just as they did under the original mortgage. However, under a Streamline Refinance, there may be a reduction in those annual mortgage premiums.
For all case numbers assigned starting Jan. 26, 2015, mortgages with terms of greater than 15 years and loan amounts of less than or equal to $625,000 with a loan-to-value (LTV) ratio less than or equal to 95%, the annual premium dropped from 130 basis points (bps) to 80 basis points, or 0.80% of the loan amount. For LTV ratios greater than 95%, the annual premium dropped from 135 basis points to 85 basis points, or 0.85% of the loan amount.
For loans of more than 15 years and more than $625,000 with an LTV ratio less than or equal to 95%, the annual premium dropped from 150 basis points to 100 basis points, or 1% of the loan amount. If the LTV ratio is greater than 95%, the annual premium dropped from 155 basis points to 105 basis points, or 1.05% of the loan amount.
For all FHA-insured mortgages endorsed on or before May 31, 2009, the annual mortgage insurance premium is 55 base points, or 0.55% of the loan amount, regardless of the base loan amount, mortgage term or LTV ratio.
When refinancing through the FHA Streamline Refinance program, you may receive a refinance credit on the upfront mortgage insurance premium (MIP) paid on the original mortgage. This credit can be applied to the Streamline Refinance. Talk with your lender to ensure any credits you’re due are received and applied to the new mortgage.
Under the FHA Streamline Refinance program, the key benefits are reducing your interest rate and, maybe, the term of your mortgage loan. However, it’s important to evaluate all of the pros and cons of the program before deciding if this mortgage product is right for you and your financial needs and goals.
In fact, Kapfidze recommends homeowners shop for a mortgage refinance product by looking at all their options rather than just settling for the FHA Streamline Refinance program.
“Don’t just say, ‘I am shopping for an FHA Streamline Refinance,’ because that may not be the best product for you,” he said. “It may turn out that the FHA Streamline Refinance is the best product for you, but you want to let that be a result of your search and not something that you preordained as you look to refinance.”
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