The FHA Streamline Refinance program is a special program reserved for homeowners that already have an FHA loan. It gives these homeowners the ability to refinance into a lower rate and possibly lower their mortgage insurance premium if a significant portion of the outstanding principal was already paid down. Many borrowers with an FHA loan benefit from the FHA streamline program because it does not require the same verifications that the original FHA loan required. The largest benefit is that it does not require a new appraisal – the original appraisal can be used for qualification purposes. This means that even homeowners that are drastically underwater (owing more than the home is worth because the value dropped) can refinance into a lower rate and save money. A few other perks include the lack of need for credit, income, employment, or asset verification in order to qualify. Basically, as long as you can show a financial benefit (your new payment will save you money) you will get approved for the new FHA refinance. As with any loan, however, each lender can impose their own requirements. If you find a lender that will not approve you for the streamline program, you have the option to apply with a few other lenders, in the hopes of finding one with fewer lender overlays in place.
Basic FHA Streamline Refinance Guidelines
The basic requirements for the FHA Streamline Refinance are very simple:
- You must have an FHA loan right now
- Your mortgage history must be perfect for the last 3 months (no late payments)
- Only one late payment is allowed in the 9 months preceding the last 3 months
- 6 payments must have taken place on the current mortgage before the refinance
If you meet these requirements, you are qualified as far as the FHA is concerned. Remember, however, that the FHA is not funding the loan. It is their job to insure the loans in order to provide a greater number of people with the ability to own a home. This does not mean that every lender will readily hand out a streamline refinance without further evaluation.
Role of your Credit History and Credit Score
Technically, your credit report is not required in order to obtain an FHA Streamline Refinance. This is according to the FHA, but most lenders will pull your credit and view the score in order to ensure that you have continued to exercise financial responsibility. Most lenders will not accept a loan application for a credit score below 620. Some lenders may grant an exception, but you will have to prove dire, one-time circumstances to ensure that they can overlook the low score. In addition, some lenders will look beyond your housing history, ensuring that you have no other late payments reporting. However, in general, as long as your last 3 months of mortgage payments were made on time and no more than one late housing payment was made in the 12 months preceding the application, you should be a good candidate for the program.
Role of your Income
Your debt ratio was probably a hot topic during the initial loan process. The lender probably thoroughly evaluated your income, employment history, and how it related to your current debts. They calculated your debt-to-income ratio to make sure it was in line with the FHA guidelines, which hover around 43% on the back end, meaning that your total debts cannot be more than 43% of your gross monthly income. The FHA Streamline Refinance does not verify your income, however. This means that you could be unemployed or have changed jobs recently and still have the opportunity to refinance. This is an area that some lenders will agree with the FHA and ignore, while others will still want to verify that you have an income and can continue to make payments. Because the streamline refinance lowers a borrower’s payment, many lenders are more lenient regarding verifying income and/or employment since a lower payment is easier to afford no matter the situation.
Maximum Loan Size
One of the largest stipulations of the FHA Streamline Refinance is the loan size. The purpose of the program is to lower your payment, which means your loan amount should not exceed the amount of the outstanding principal. The only exception to this rule is the addition of upfront mortgage insurance and the cost of one month’s worth of interest, so that you do not have to bring that amount to the closing. The maximum loan amount is an FHA rule, which means lenders cannot go around that stipulation, enforcing their own guidelines on this matter.
FHA Streamline Refinance Closing Costs
A major difference between the FHA Streamline program and the standard FHA loan is how the closing costs are handled. On your original FHA loan, you may have had the opportunity to roll your closing costs into the loan, allowing you to bring little to no money to the closing table. The Streamline refinance, however, does not allow any closing costs to be wrapped into the loan amount as the loan amount should not increase higher than your outstanding principal aside from the mortgage insurance you must pay upfront. The only way around this matter is to obtain a Zero Closing Cost loan, which means the lender is paying your closing costs, but this comes at a price. The closing costs are not just paid by the lender out of the kindness of his heart – he will pay them in exchange for you accepting a higher interest rate in order for him to make a higher profit. Because the point of the Streamline refinance is to lower your payment, this is generally not an option for borrowers.
Mortgage Insurance (FHA MIP) Requirements
Mortgage insurance is always a requirement of any FHA loan, including the FHA Streamline Refinance. The amount you pay this time around might be a little different, depending on when your first FHA loan was originated. If it was before June 1, 2009, you will pay the following rates for a 30-year term:
- Upfront MIP – .01 percent of the new loan amount
- Annual MIP – .55 percent of the new loan amount
If your original FHA loan originated after June 1, 2009, you will pay the following rates:
- Upfront MIP – 1.75 percent of the new loan amount
- Annual MIP – 0.85 percent of the new loan amount
These figures are based on 30-year terms with 5% or less put down on the home and loan amounts lower than $625,000. If you put down more than 5% or you opted to have a new appraisal performed on the home and it is found that you owe less than 95% of the value of the home, you would pay a reduced rate of .80 percent for annual MIP, if the loan amount was under $625,000.
Higher loan amounts, meaning those that reach over $625,000 pay different rates including:
- Less than a 95% LTV, pay annual MIP of 1%
- Greater than a 95% LTV, pay annual MIP of 1.05%
If the term of your loan is 15 years, the following rates prevail for loan amounts less than $625,000:
- Less than a 90% LTV, pays annual MIP of 0.45 percent
- Greater than a 90% LTV, pays annual MIP of 0.70 percent
If the term of your loan is 15 years and the loan amount is greater than $625,000, the following rates apply:
- Less than 78% LTV, pays an annual MIP of 0.45 percent
- LTV that is between 78% and 90%, pays an annual MIP of 0.70 percent
- LTV greater than 90%, pays an annual MIP of .95 percent
Mortgage Insurance Refunds
If you are applying for the FHA Streamline Refinance within 3 years of the origination of the original FHA loan, you will receive an MIP refund of the upfront mortgage insurance you paid. The amount is prorated depending on the amount of time that has passed since the original loan was taken out. Because you must wait 6 months to refinance into a streamline loan, the maximum refund you would be eligible for is 70% of the upfront MIP you paid on your first loan. The amount you receive back decreases by 2 percent every month that passes, with the final amount ending at 10% on the 36th month following your loan origination.
Last, but not least, is the option to have MIP cancelled on your loan. This only occurs if the new refinance is 90% of the value of the home. If this is true, you only pay MIP for 11 years and then it is automatically cancelled. This is the only time that the insurance can be cancelled. Borrowers that feel that their home value has increased enough may opt to pay for a new appraisal to see if they hit that 90% threshold, allowing them to save even more money in the long run.
Remembering that every lender has their own requirements, you may want to apply for the FHA Streamline Refinance with several lenders. The guidelines posted above are strictly those that the FHA requires. These are the minimum requirements that the FHA will allow in order to insure the loan. The lender is the one that is providing the funds to you, which means they may want you to have an appraisal or may want to evaluate your credit or income. Some lenders are more lax than others when it comes to these loans, so if you don’t want to pay for an appraisal or you know your credit score has dropped since the original loan and you don’t want to be declined, shop around with other lenders that have different lender overlays in order to obtain your streamline refinance.