An FHA streamline refinance is for current FHA mortgage holders. This quick and easy program enables you to lower your interest rate on your current FHA loan without very much work involved. It carries the same leniency that the original FHA mortgage had when you obtained it and even requires less paperwork to render your approval. There are several benefits to refinancing with this streamlined loan including the ability to not only lower your interest rate, but your mortgage insurance premium as well. In the end, you are left with a lower payment that allows you to pay down your mortgage faster.
In order to qualify for the streamline refinance you must hold a current FHA loan. In addition, your mortgage payments must have been made on time. Last, but not least, you must show that by refinancing, you are reaping a financial benefit, which is usually displayed by having a lower payment, saving you at least 5% each month. If you are not saving at least 5% you will not be eligible, but this is for your own good as it saves you from the cost of refinancing without it providing you with any tangible benefits. This is called the net tangible benefit test and will be performed on every streamline refinance that goes through the system. As an added benefit, however, no FHA streamline refinance is subjected to an appraisal. This means that you can even be upside down on your loan, meaning that you owe more than your house is worth, and still be able to refinance. This works to the benefit of many homeowners that are finding that they have little to no equity in their home as a result of the housing crisis. A lower payment can make it easier to keep their home, making their payments on time, and possibly even paying off the principal even faster by making larger principal payments and less towards interest.
The maximum loan size for a streamline refinance differs from any other type of loan. The purpose of this loan is to save you money each month. In an effort to meet this goal, the loan size is maximized at your outstanding principal balance plus any upfront mortgage insurance and the amount of one month’s interest costs. Unlike the original FHA loan that you obtained, you cannot wrap any of your closing costs into the loan amount. It is restricted to those two figures. The amount above and beyond those two numbers must be brought to the closing in cash by you or your lender must be providing you with a “FHA streamline refinance with zero costs.” The most common method is to keep the balance at the principal plus the upfront MIP, however, as the zero cost refinance carries a higher interest rate which typically negates any financial benefits you may have received for obtaining the loan.
Your credit history does not play a role in the FHA streamline refinance, believe it or not. If you already have an FHA loan, your credit score is not used. What the lender uses instead in order to qualify you is your mortgage history. The real catch is they only go back 3 months. This means that you must have a perfect mortgage history for just 90 days. They will go back and look at your overall mortgage history for the last 12 months, strictly looking for late payments in that time. One late payment in the prior 12 months to your loan application is what is allowed. If you have more than one late payment during that time, you will have to wait until you are 12 months out from the latest late payment in order to qualify. The 3 months immediately preceding the loan application are what matter the most however. The late payment cannot be within those 3 months or you will have to wait until you have 3 months in a row with timely payments in order to refinance as long as that is the only late within the last 12 months.
As a side note, however, some lenders will pull your credit just to reassure themselves that you are a good credit risk. In general, lenders want your credit score around 640 in order to qualify; however, not all lenders will require that. If you find that one lender turns you down for a credit score between 600-640, shop around with other lenders, there are plenty that will take the risk because of the guarantee that the FHA provides on an FHA streamline refinance loan.
Debt ratios are an often crucial component of the loan underwriting process as they show the lender how you handle your finances, including how much of your gross monthly income is tied up in monthly obligations. With the FHA streamline refinance, however, debt ratios do not play a role in the approval process. You do not have to verify any of the standard items that would have to be verified with any other type of loan. This means that you do not have to provide:
- Pay stubs
In reality, this means you could have changed jobs and still be able to refinance your FHA loan into a lower rate. This is possible because the loan is only eligible for those that show a net tangible benefit, meaning that you are lowering your payment significantly enough to have an impact on your monthly finances. Even if you have changed jobs, having a lower rate and lower MIP will help make it easier to make your payments in a timely manner, lowering the risk for the lender in the end.
Just as you had to obtain mortgage insurance for your original FHA loan, you will need it again with the FHA streamline refinance. It does work a little differently with this loan, however. First you will have to determine when your FHA loan originated. If it was before June 1, 2009, you are in one category and if it was after June 1, 2009, you are in the other category.
- Prior to June 1, 2009 – Those loans that were closed and endorsed by the FHA before June 1, 2009 are eligible for lower upfront MIP and annual MIP rates. The upfront MIP is equal to .01 percent of the loan amount and the annual MIP is .55 percent of the loan amount. To put it into perspective, if your new loan amount is $200,000, you would pay $20 up front at closing and $91.67 per month for the annual MIP.
- After June 1, 2009 – Those loans that closed after June 1, 2009 are charged the newest FHA insurance rates which are: 1.75% upfront MIP and 0.85% annual MIP. On the same $200,000 loan, this would mean $3,500 at closing and $141.67 per month for the annual mortgage insurance.
These figures apply strictly to 30 year loans with an LTV greater than 95%, which typically means that the borrower put down the required 3.5% down payment and nothing more. The borrowers that put down more than the 3.5% and have an LTV less than 95% on a 30-year loan will pay .80% for annual MIP. These figures pertain to loans that are less than $625,000. Any loan over $625,000 is subject to different rates and is as follows:
- Loans greater than $625,000 but less than 95% LTV have annual MIP of 1%
- Loans greater than $625,000 but greater than 95% LTV have annual MIP of 1.05%
In addition, loans that have a shorter term of 15 years rather than 30 years are subject to the following rates:
- Loans less than $625,000 with an LTV lower than 90% have annual MIP of .45%
- Loans less than $625,000 with an LTV greater than 90% have annual MIP of .70%
- Loans greater than $625,000 with an LTV less than 78% have annual MIP of .45%
- Loans greater than $625,000 with an LTV between 78% and 90% have annual MIP of .70%
- Loans greater than $625,000 with an LTV greater than 90% have annual MIP of .95%
There is one exception to this rule, however. If you are obtaining the FHA streamline refinance within 3 years of the origination of your FHA loan, you may be eligible for a prorated MIP refund. The refund decreases with each passing month that you have had your FHA mortgage. The standard rule is that you are not eligible to refinance your FHA loan until you have made 6 timely payments along with the requirement that 210 days have gone by since the origination of your loan. With that being said, if you were to take advantage of the FHA streamline refinance on your 6th month, you could get as much as a 70% refund on the upfront MIP that you paid at closing on the original loan. The amount of the refund decreases from there, with the final month, which is month 36 giving you a 10% refund. Remember, this refund is strictly on the upfront mortgage insurance; there is no refund on the annual mortgage insurance that you have paid through the months you have had this loan.
The last exception to the rule pertains to cancellation of MIP. If the FHA streamline refinance has an LTV of less than or equal to 90% at the time of the closing, the MIP is only required to be paid for 11 years. Any other loan with an LTV greater than 90% is required to pay the MIP for the duration of the loan. The LTV is figured based off of the original appraisal that was conducted when you obtained the original FHA loan. If you are trying to reduce the length of time you must pay MIP and believe you will be below 90% LTV, you can pay for a new appraisal to help you get the lower LTV.
The closing costs for the FHA streamline refinance are similar to those of any other loan with the exception of the appraisal cost if you opt to skip the appraisal. Aside from the benefit of determining if your LTV is low enough to cancel your MIP after 11 years, there is one more benefit to paying for an appraisal – you have the benefit of being able to roll your closing costs into the loan if the appraisal comes back higher than it was when you originally purchased the home. If you are sure that your home has increased in value, it could be worth paying for the appraisal simply to be able to roll your closing costs into the loan, if you do not have the cash to pay for them up front.
Aside from the appraisal cost, if you choose to go that route, the standard closing costs will apply:
- Origination fee
- Underwriting fee
- Credit processing (if the lender pulls your credit)
- Title fees
- Appraisal fee (if applicable)
- Document fee
If you are paying the closing costs up front and opting not to have the appraisal, you will be required to provide 2 months’ worth of bank statements to prove that you have the assets to pay for the closing costs on your own. If you do not have the money, you can look into the zero closing cost streamline refinance, which enables the lender to credit your closing costs for you. The problem is that the interest rate will be higher, which makes it more difficult to pass the net tangible benefit test.
So what exactly is required for the FHA streamline refinance? It is quite simple! You need the following:
- Copy of the current FHA mortgage to show the interest rate, term, and loan amount of the FHA loan
- Mortgage statement from your current mortgage
- FHA case number which can be found on the HUD-1
- Proof of homeowner’s insurance
- Verification of employment (most lenders require this)
- Proof of assets for the closing costs