After the economic slump of the past few years the economy is in a slow, but seemingly steady recovery. Things are starting to look up for many of the families impacted by the slump. Part of the reason is because families were able to take advantage of the loans offered through FHA programs. In fact, FHA loan refinances now account for a large portion of loans approved in today’s market, which isn’t surprising when you consider that these loans were created during times of economic turmoil to reduce the financial blow for struggling families. However, while there are many refinances being offered through government programs there is one in particular worth mentioning– the streamline refinance. This refinance is the darling of FHA lenders and homeowners alike and for good reason.
Qualifying for an FHA Loan Refinance
To understand the streamline you first need to know the basics of FHA financing. First and foremost, FHA does not approve loans or lend money in any way. Instead, it insures the loans that are given to homeowners by approved lenders, lenders that follow the underwriting guidelines of the administration. Because these loans are government insured, the lenders are able to take on the financial situations of people that may be considered a higher risk by conventional lenders.
As a general rule of thumb, you can qualify if your credit score is as low as 500, although the higher the better. It is important that you have a stable credit report that shows you are responsible with your debts, and a debt to income ratio after completion of the loan that is no higher than 43%. It’s also important that you’ve waited a couple of years to apply if you’ve had a bankruptcy or foreclosure. The standard time frame is two years for a bankruptcy, three years for a foreclosure.
Documentation for Standard FHA Loans
To qualify for an FHA loan you need to come to the table prepared with a few documents. First, you’ll need your job history that shows that you’ve had a stable job with pay that has remained fairly steady for the past couple of years. You also need to come with documentation of your assets and debts, including any real estate you own. Loans and financial commitments that affect your credit score need to be presented with the rest of your information; all of these will be a factored in when your loan is considered. Your credit report and score will be pulled and studied, and for standard FHA loan refinances you’ll need to get an appraisal done. To simplify it you will need:
- Your recent check stubs and W-2 forms for the past two years
- Tax returns of the past two years
- If you are self employed, bring documentation that shows proof of income and expenses
- Any information regarding additional real estate ownership
- Employer information (name, phone number, address)
- Your identification information (social security card, drivers license)
- The address of the home you currently reside in
- The information of the home you are refinancing
- Checking and savings account statements
- Assets statements
- Expenses statements (major open loans, value of debts and assets, etc)
- Appraisal and credit report, both of which you’ll need to pay for
Once the lender has been given all of your documentation he is then in a position to determine whether or not you will be financially capable of handling the loan and, if so, what the final terms of your particular loan will be. He will, of course, be following the FHA underwriting guidelines for all of this.
Qualifying for a Streamline Refinance
While the terms mentioned above are the standard qualifications for an FHA loan refinance you’ll find that the streamline is a little different. This is why people love it. The process to qualify for a streamline refi is quite a bit easier than the process for a standard FHA loan. Streamline loans use much of the information that was supplied for the first loan so that you don’t have to provide as much documentation. Because there is less documentation the process is also faster than it is for a standard refinance. In addition, since the documentation being used for this refinance is already in the hands of the lender it’s not always necessary to get a new appraisal done for approval. The required documents for a streamline refinance are as follows:
- Social security card and drivers license
- Mortgage Statement
- Homeowners insurance information
- Your FHA case number (the number assigned by the FHA for the loan you currently have). This is found on your mortgage note
- Any documents required by your lender, which may vary per lender
These documents are going to get you started on your refinance. You may need to provide additional documentation at the request of your lender, so having the documentation on hand and ready to go can be helpful.
Keep in mind, FHA streamline refinances are only for individuals who currently have FHA mortgages. You can take advantage of FHA financing by refinancing your conventional loan into an FHA loan, but you can’t just switch it to a streamline. It’s also important to realize that these particular refinances aren’t a good way to cash out any equity or increase the mortgage amount. Their purpose is to open up the way for the homeowner to adjust the terms of the loan to better fit his needs. It is required that you see a reduction in your interest rate and/or mortgage payment in order to qualify for the loan. Of course, these reductions mean extra money in your pocket every month and extra money makes for a happy piggy bank!
While refinancing a home isn’t a perfect solution to a financial problem it can be beneficial if you play your cards right. As a word of caution– be sure to calculate all of your numbers before you ever lock yourself in on the loan. You will be the one paying for the loan so you want to make sure that the loan you get gives you a financial benefit that is worth the time and money required to complete it.