FHA Streamline Refinance: What Is It and How Does It Work?

Many loan-holders make the FHA Streamline Refinance their top choice, for two main reasons. It is both the simplest and the fastest refinance option for a Federal loan. With minimal requirements and the ability to qualify with an underwater mortgage, this is a profitable choice for many FHA loan-holders. Here’s what you need to know about what is and is not required to procure an FHA Streamline Refinance.

FHA Approved Appraisal: Not Required!

RefinanceThis is the big one for most Streamliners. Because you can use either an old appraisal or the original purchasing price of your home to represent the market value, its actual worth at the time does not have to come into play. Removing the FHA approved appraisal is a big Welcome mat for underwater mortgages. Streamline is the only refinance option that will allow you to participate even if you owe twice the value of your home! No fees, no penalties.

This has been an enormously popular movement in light of the housing market downturn of the last ten years. People can pay less every month on their mortgage regardless of their Loan to Value (LTV) score.

Guess What Else is Not Required

Right around the same time as the crash in the housing market, many of the requirements for FHA mortgages were abolished in an effort to make qualification achievable for the majority of US citizens. In the current guidelines for an FHA Streamline Refinance, a borrower is not required to provide verification of employment, income or credit score. They don’t need to see paystubs, W-2s or tax returns, and a FICO score below 500 is eligible.

So let’s say that you have completely destroyed your credit, are currently jobless, without a reliable source of income, and have no equity in your home. The FHA doesn’t want to know about that. You can still streamline your mortgage!

This may sound hard to believe, but it is very possible because of the way that the Federal Housing Administration is designed. Their entire program runs off of the money made on mortgage insurance. The more mortgages they can insure, the more money they make. Dropping the requirements and lowering the monthly payments means that more Americans can qualify and more mortgages can be insured. You may feel like you are getting a big break, but it was the difference between success and failure for the FHA program.

 Eligibility for Streamline Refinance

There are a few basic standards for the borrower to qualify. The number one is that you must have a perfect payment history for the last three months of your mortgage. You may not have any 30, 60 or 90-day late payments, although you are allowed to have one late payment in the last year of your mortgage. The mortgage must also be current when you close the new loan. This is a big one because the FHA’s main goal is to reduce the overall risk for all the loans they insure. Therefore the likelihood of you making your payments on time every month is the detail they need to verify.

Before you can apply for this refinance option, you must make six months of payments on your FHA loan and it must be at least 210 days from the closing date. There is also the issue of Net Tangible Benefit: a purpose for refinancing the loan. This is meant to keep a borrower from engaging in a transaction where the cost outweighs the benefit. It is the lender’s responsibility to determine whether you will have a reduction of at least 5% in the principal and interest (P&I) of the mortgage payment plus the annual mortgage insurance premium (MIP). This means that the total monthly payment for the refinanced loan must be 5% less than the previous amount. A switch from an adjustable rate to a fixed rate mortgage also qualifies as tangible benefit.

One thing you cannot do with this action is increase the loan amount to cover closing costs. All expenses related to the refinance must either be paid in cash by the homeowner or financed fully by the loan officer, which is called a “zero-cost FHA Streamline.” There is no cash-out option, either. You may not receive money based on the equity in your home to pay bills or make large purchases.

As with all FHA transactions, the borrower must make an upfront mortgage insurance payment at closing as well as an annual mortgage insurance payment (MIP) every month. Homeowners who are replacing a loan endorsed before June 1, 2009 (“grandfathered mortgages”) will have greatly reduced rates for both types of insurance payments in comparison to those who came after (new mortgages). If your loan is well seasoned, your upfront insurance cost could be as low as $10!

The FHA Streamline Refinance program was created as a response to changes in the financial reality of the American citizen. It provides a break in overall monthly expenses for those who have paid their mortgage faithfully and rewards those who have spent several years enjoying and paying for their home through reductions in insurance. The key is not so much circumstance, but substance.

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