FHA Streamline Refinance: Pros and Cons

A man holding a clipboard with the words FHA streamline refinance program.In the world of home financing, the FHA Streamline Refinance program stands out as a popular option for homeowners looking to reduce their mortgage payments.

However, like any financial decision, there are both advantages and drawbacks to consider. Understanding the pros and cons of this refinancing method is crucial in making an informed choice that fits your financial goals.

Let's delve into the benefits and potential pitfalls of FHA Streamline Refinance to help you navigate this intricate landscape with confidence.

Key Takeaways

  • Current FHA borrowers with a solid 12-month payment history on their loan
  • Homeowners looking for lower monthly mortgage payments
  • Anyone seeking to refinance into a lower fixed interest rate
  • Borrowers wanting to avoid standard refinance costs like the appraisal
  • Those with limited funds to cover closing costs
  • Homeowners needing simpler and faster refinancing

Understanding FHA Streamline Refinance

The FHA streamline refinance program lets you refinance an existing FHA mortgage into a new FHA loan with lower interest rates and mortgage payments. These refinances allow you to take advantage of better rates without the usual refinancing costs.

With an FHA streamline, you typically won't need an appraisal or extensive income and credit verification. The lender mainly reviews your payment history on the current FHA loan to qualify you. Closing costs are limited compared to a traditional mortgage refinance.

It would be best to qualify for an existing FHA mortgage that is at least 12 months old. The property securing the loan can't have any additional liens. And you need to show a "net tangible benefit" from the new loan.

Now, look at an FHA streamline refinance's key pros and cons.

Advantages of FHA Streamline Refinance

Here are some of the most significant advantages of refinancing into an FHA streamlined loan:

  • Lower interest rate: The main reason to refinance is to reduce your interest rate and lower your monthly payments. FHA streamlines allow rate and term refinancing.
  • Lower mortgage insurance: FHA streamlined refinances require lower upfront and monthly mortgage insurance premiums than a new FHA loan.
  • No home appraisal: An appraisal isn't required, saving borrowers this closing cost. However, lenders can order one if the valuation is in question.
  • Limited credit check: A soft credit pull is usually needed vs. a hard inquiry for a traditional refinance.
  • Minimal documentation: Streamlined income and asset verification make for a more straightforward process.
  • Lower closing costs: No appraisal and limited paperwork keep closing costs down.
  • Cash-out limits: You can take some money out up to $500 in some instances without full underwriting.
  • No seasoning requirement: FHA streamlines can refinance a loan of any age, unlike other refinances requiring 6+ months of seasoning.
  • Credit score leniency: Lenders may allow credit scores as low as 580 for streamlined refinances.
  • Rate/term refinance: Reduce rate and term without adding costs to the loan balance.
  • Easy process: a more accessible, quicker refinance option without the usual hassle.

For eligible FHA borrowers, a streamlined refinance provides an affordable way to lower your rate and payment through a simple process.

Limitations of FHA Streamline Refinance

On the downside, here are some potential drawbacks to an FHA streamline refinance:

  • You must have an FHA loan. You can only refinance an existing FHA mortgage, not a conventional loan.
  • Upfront MIP is still due. You must pay an upfront mortgage insurance premium of 0.5% of the loan balance.
  • No cash out: Limited options for taking equity out of the home
  • Rates may be higher. Streamlined refinance rates can be slightly higher than traditional loan rates.
  • Remaining loan terms: You can't extend your loan term; you can only lower the rate or payment.
  • Can only be used once: FHA only allows one streamlined refinance of a property.
  • Not for significant renovations: Must use a 203(k) loan for renovations over $35,000.
  • Ineligible for late payments: You need a solid 12-month payment history to qualify.
  • Net tangible benefit required: The new loan terms must provide a real monetary benefit.
  • Closing costs: While lower, closing costs still apply and can add up. Shop for the best lenders' deals.

While FHA streamlines offer a simpler refinance, the limitations may make a different option more optimal, depending on your goals.

Eligibility Criteria for FHA Streamline Refinance

If you want to refinance into an FHA streamlined loan, here are the main eligibility requirements:

  • An existing FHA loan must have been insured at least 12 months ago.
  • Loan-to-value ratio no more significant than 97.75%
  • At least six months of on-time mortgage payments
  • No late payments in the past 12 months
  • No cash taken out above $500
  • An appraisal is usually not required.
  • Credit score minimum: 580
  • The existing property is undamaged.
  • A loan must provide "net tangible benefit."

You can qualify for easy streamlining refinancing if you meet these requirements and the FHA's standard criteria. Some lenders may impose overlays and stricter requirements.

Process of FHA Streamline Refinance

Here is an overview of the FHA's streamlined refinancing process:

  1. Find a lender. Compare FHA streamline offers from multiple lenders. Look for the best rates and closing costs.
  2. Apply for prequalification. The lender will verify your payment history on the FHA loan being refinanced. This prequalifies you without heavy documentation.
  3. Get an Estimate of Costs: The lender provides a Loan Estimate detailing the expected new loan amount, rate or term, payments, and closing costs.
  4. Underwriting review: Limited documentation is required. The lender verifies that you meet all FHA streamline requirements.
  5. Get loan approval. With approval, you can move the refinance into a new FHA mortgage.
  6. A new loan closes. At closing, you sign the loan documents. The old mortgage is paid off with the latest FHA streamlined loan.
  7. Lower payments begin: Once the refinance funds are received, you start making the lower monthly payments on the FHA loan.

This limited documentation process makes refinancing fast and smooth with an FHA-streamlined mortgage.

Assessing the Benefits of FHA Streamline Refinance

The new FHA loan must provide a "net tangible benefit" over your existing loan to qualify. This means the new loan terms will measurably improve your position. Common ways include:

  • Lower your interest rate to reduce your monthly payments.
  • Shorter loan terms to pay off the mortgage faster
  • Lower mortgage insurance premiums
  • Moving from an ARM to a fixed-rate

Your lender will ensure the refinance provides a tangible benefit. But it would be best if you also did the math to ensure the savings outweigh closing costs over time.

An FHA streamlined refinance allows eligible borrowers to refinance quickly into lower rates and payments. Just be sure the costs make sense, and you fully understand the limitations before proceeding. Consult a knowledgeable loan officer to discuss whether this program is your best option.

SOURCE:
FHA underwriting Section C. Streamline Refinances