The ins and outs for the FHA Streamline Program
FHA (Federal Housing Administration) has permitted streamline refinances on FHA insured mortgages since the early 1980’s. The streamline refers only to the amount of documentation and underwriting that needs to be performed by the mortgage company, and does not mean that there are no costs involved in the transaction.
Streamline The Following Loan Types
Note: All loans that are to be FHA Streamlined must be currently insured by FHA (Federal Housing Administration).
- Fixed Rate Mortgage
- Adjustable Rate Mortgage
- Graduated Payment Mortgage
- Secure Mortgage
- Condo Loans
- Rehab Loan
- Energy Efficient Mortgage
Requirements for an FHA Streamline.
- The mortgage to be refinanced must already be FHA insured. (This will show on your mortgage note)
- The mortgage to be refinanced should be current (no 30 day late payments within the past 6 months).
- The refinance is to result in a lowering of the borrower’s monthly principal and interest payments. In fact the refinance must be lowered by at least 5%.
- No cash may be taken out of mortgages refinanced using the streamline refinance process.
Benefits of the FHA Streamline
No Closing Costs
Depending on the type of streamline the borrower chooses, they may be able to get an FHA Streamline at no cost.
Defer 1 months payment
Most companies call this skipping one months payment but legally the borrower isn’t actually skipping a payment, they’re simply pausing their loan for 1 month.
As long as the new loan balance does no exceed the homeowner’s current loan balance FHA does not require an appraisal for the refinance. Although if you wish to add the closing costs to the new loan, you will need to get an appraisal.
No Income Qualifications
The homeowner must not have had any 30 day late payments within the past 6 months. If they have, they will not be able to do a Streamline Refinance until it has been 6 months since their last missed payment. Keep in mind this is an FHA Requirement. Sometimes lenders will require some additional qualification barriers.
Types of Streamline Refinances
No Cost Streamline (No Appraisal)
The mortgage broker will offer the borrower a slightly higher interest rate in order to make more on the loan. This is done in order to pay for all the closing costs of the refinance such as the title insurance, origination fees, etc… The benefit of doing a streamline this way is that the borrower is able to refinance their FHA Loan with no out of pocket expense. No appraisal is needed with for type of FHA Streamline as the loan amount will not increase. Their are on the other hand some very minor requirements noted below.
Note: This does not mean that the broker includes the closing cost into the new loan balance, it means they are paying for the closing costs from the extra income of offering a higher interest rate.
No Cost Streamline (With Appraisal)
This type of Streamline is done by simply adding the expected closing costs into the balance of the borrowers new loan. The borrower may only do this type of streamline if the equity in the home will cover the closing costs of the refinance. This type of streamline does require an appraisal as FHA has a Loan To Value ratio of 97%. This means that the new loan balance including the closings costs may not exceed 97% of the homes appraised value. This can be a beneficial streamline to borrowers who are looking to stay in their current home for some time and wish to have a very low payment.
Note: Ask your new lender how long it will take for the savings to pay for the closing costs which are now added to your loan. If the answer is greater than 6 years you might want to reconsider the transaction.
Streamline with closing costs
The mortgage broker will “hopefully” offer the you the lowest rate possible and have the borrower pay for the closing costs out of their own pocket. The benefit of doing this type of streamline is that the borrower is able to get a lower interest rate by an average of dropping a full percent.