Streamline refinancing enables you to secure a lower interest rate on your mortgage without having to go through the original headaches you went through to get the original mortgage. Whether you have an FHA, VA, or USDA government backed loan, you have the option to streamline the refinance process if your goal is strictly to lower your interest rate.
The FHA Streamline Loan
The FHA Streamline Loan enables you to lower your interest rate and payment with a few simple steps. What you do not need for this loan is:
- A credit report
- An appraisal
- Verified income
- Verified employment
What you do need to prove is that you do not have any late housing payments in the last 3 months. In addition, the 9 months preceding the last 3 months cannot have more than one 30-day late payment as far as your housing payments are concerned. This is how the FHA gauges your risk level for streamline refinancing. If you have too many late housing payments, the FHA and the new lender will not want to take a risk writing a new loan for you.
The goal of the FHA Streamline Refinance is to make your housing payments more affordable, but it is for those borrowers that are serious about their housing payments. If you do not have a solid payment history, you do not show that your housing payments take priority.
Once you are confident that you have the timely housing payments, you will need a few other things for the FHA Streamline Refinance:
- Proof that you have enough assets to cover the closing costs. You cannot roll the closing costs into the loan. The only cost you can roll into it is the upfront FHA mortgage insurance premium. If you cannot pay the closing costs or cannot prove the liquid assets to pay them, you can negotiate with the lender to have them pay the closing costs for you, but you will do so in exchange for a slightly higher interest rate. This rate must still be lower than your current rate in order to qualify.
- Proof that the new payment is lower than the existing payment. The only exception to this rule is if you refinance from an adjustable rate loan to a fixed rate loan. In this case, your interest rate and/or payment can increase slightly and still leave you eligible for the loan.
The best news regarding the FHA Streamline Refinance is the ability to get a refund of the upfront MIP you paid on the original loan. You can receive a refund if you refinance within the first 3 years of obtaining the original loan. The amount you receive depends on how much time passes between the original loan and the refinance, but it starts at 70% after the six month, which is when you are eligible to refinance and goes down to 10% during the 36th and last month.
VA Streamline Loan
The VA Streamline Loan is called the Interest Rate Reduction Refinance Loan. As the name suggests, this streamline refinancing program helps you reduce your interest rate. Just like the FHA Streamline, you do not need to verify very much for the loan, as the VA allows the lender to use the initial qualifying factors used for the original VA loan.
The VA Streamline Loan works much the same way as the FHA Streamline Loan works. You must prove that you have made your housing payments on time. For this program, you are allowed one 30-day late housing payment during the last 12 months. If you have more than that, you will have to wait to refinance until you have a solid 12 months with only one late payment. In addition, you must prove that there is some type of benefit for the refinance. Typically, this benefit means that your payment and/or interest rate are lower. There are some instances when this is not the case, however, including:
- Refinancing from an adjustable rate to a fixed rate
- Refinancing from a 30-year term to a 15 or 20-year term
- Including energy efficient changes in the loan (up to $6,000 is allowed)
The final few things you need to prove include occupancy in the home up to the date you apply for the refinance (owner occupancy is not required after the refinance) and that you benefit from the refinance.
The one thing that the VA Streamline Refinance has that the FHA and USDA refinance do not is that you can roll the closing costs into the loan. The VA limits the loan amount to the outstanding principal, plus the upfront funding fee, and the closing costs. This makes the VA Streamline very affordable as you do not have to verify any assets in order to qualify.
USDA Streamline Refinance
Just like the FHA and VA Streamline Refinance programs, the USDA Streamline offers a simple format to help you lower your interest rate and payment. You do not need an appraisal, credit score, or income verification for this program either. You simply have to verify that you occupy the property; that you have a current USDA mortgage; and that you have made your housing payments on time. Just like the FHA and VA refinance, you cannot have more than one 30-day late payment in the last 12 months.
The requirements that the USDA Streamline Loan has that are a bit more specific than the other programs include:
- You must be lowering your interest rate at least 1 percent in order to qualify; this is where the USDA determines that it is worth refinancing
- You cannot cut the term short – you have to take out another 30-year term
- The new payment must be at least $50 less than your current payment
These requirements are fairly easy to hit and are much easier than waiting for the value of the home to come back to see if you have enough equity to refinance or worrying about your credit score because it dropped recently.
The USDA Streamline Loan operates much the same way as the FHA Streamline Loan in terms of closing costs, though. You cannot include the closing costs in the loan – you have to be able to pay for them on your own. The USDA limits the loan amount for the refinance to the outstanding principal balance plus the upfront guarantee fee of 2 percent – nothing else can be added.
Streamline Refinancing is Worth It
If you want to get ahead in the equity of your home or you just want to have more disposable income every month, streamline refinancing is worth it. You have to do half of the work you had to do for the original loan and you get a lower rate/payment as a result. Basically, if you pay your mortgage on time and you hold one of the above government-backed program, you can refinance it.
This is great news for borrowers that live in an area where the values have dropped or for those borrowers that experienced financial difficulties and it is portrayed in their credit score. The government entities offering these programs are here to help you, which is why they offer the opportunity to lower your payment and interest rate in order to make the payment as affordable as possible.