FHA streamline refinance refers to the decision to refinance an existing FHA-insured mortgage, requiring limited borrower credit documentation or underwriting needs. This option is available under both credit-qualifying and non-qualifying options. It is a reference only to the actual amount of underwriting and documentation that the lender must do and is not a reflection of fewer costs during the transaction.
There are four basic requirements of the FHA streamline refinance process.
1. The mortgage in question must already be insured through FHA.
2. It must be current to qualify for refinancing (it cannot be delinquent).
3. The results must offer a net tangible benefit to the borrower, with definitions varying from the type of loan being refinanced, the interest rate of the lending product, or the terms of the new loan.
4. Cash in excess of $500 cannot be taken out on mortgages when this process is the one that is used.
Lenders can offer an FHA streamline refinance in several different ways. Some provide a product that requires no out-of-pocket expenses for the borrower by charging a higher rate of interest on the loan. Closing costs cannot be included in the new mortgage amount of this process either.
If you are looking for a way to change the terms of your mortgage to suit your current financial situation, then here are the pros and cons of an FHA streamline refinance to consider.
List of the Pros of FHA Streamline Refinance
1. It shortens the time requirements to complete the refinance.
Because homeowners do not need to go through a credit check to qualify for the FHA streamline refinance, the process can be completed faster than it would be when using a more traditional type of lending product. There is no employment verification required with this loan either. That means it is relatively easy to qualify with terms that are reasonably favorable. If you don’t mind going through some checks, you can receive an even more favorable rate.
2. There isn’t a need to get a property appraisal.
When you go through the refinancing process using a traditional lender, then you will need to pay for a home appraisal before any terms are offered. If your home is not worth as much as it used to be, then this can make it a challenge to cover the entire loan. Thanks to the FHA streamline refinance process, this requirement is no longer necessary. It manages your current debt instead of looking at the overall value of the property. If you find yourself underwater at the moment, this process could help you out tremendously if you have managed to keep your payments current.
3. There is no maximum LTV ratio with the FHA streamline refinance option.
The FHA streamline refinance program does not look at a maximum LTV (loan-to-value) ratio either, which means even if you’re not underwater, you can still benefit from this loan. Most programs require a maximum LTV of 97%, which means the amount of the lending product cannot exceed that percentage of the fair market value of your home. If you are in the 98% or 99% range (which is not underwater), you would not qualify despite checking off every other box. This advantage is especially beneficial to new homeowners who have 5 years or less time in their property.
4. You get to benefit from a potentially attractive interest rate.
When you apply through the FHA streamline refinance process for your mortgage, then you will get to benefit from a rate that is typically up to 0.5% lower than what you would experience with a traditional lending product. You receive the reduced interest requirements because the FHA insurance premium included with the policy provides an extra layer of protection for lenders against the possibility of a default. Even if your rate reduction is only 0.125%, you could save thousands of dollars over the life of the mortgage because of the reduction in interest expenses.
5. There is no borrower income limit with the FHA streamline refinance.
This program does not apply a limit to how much money homeowners earn through their employment as part of the qualification process. Most other assistance programs that use a refinance lending product will typically use a maximum income limit to determine who is eligible for borrowing. Since this advantage removes any need to have it in the first place, more borrowers become eligible for a helpful refinance if their current mortgage does not meet their needs.
6. If you own a four-unit property with an FHA loan, then you qualify.
The FHA streamline refinance doesn’t just apply to single-family homes and condominiums. You can also apply for a refi if you used a mortgage to pay for a four-unit building that you rent to tenants. The maximum value of this loan ranges from $605,000 to $1.397 million in the Continental 48, with the cap at $2.096 million in Hawaii, Alaska, Guam, and the U.S. Virgin Islands.
7. It could lower your mortgage insurance costs with your lending product.
If you are paying on an older FHA mortgage, especially one that you obtained with no money down, then your private mortgage insurance payments could still be quite high. Taking advantage of the FHA streamline refinance process will not eliminate this expense, but it could reduce its cost for you dramatically. Although PMI eventually disappears and the MIP with this product does not, the long-term net could still be positive for some homeowners. That is why it is worth considering if you are struggling with your current payments and have an FHA loan backing your home.
8. Your FHA loan is still fully assumable.
If you work with the FHA streamline refinance process, then you still maintain the benefit of holding an assumable product. That means if the interest rates rise in the future and you’re trying to sell your home, then you can let someone take over those payments to assume the lending product. Although your buyer would need to go through the loan servicing department to qualify for the repayment, this feature is one of the unique ways that you can sell without going through some of the headaches that are part of the traditional process.
9. The rates are the same with the refi as they are with regular mortgages.
Even though there are lower credit requirements through the FHA streamline refinance as there are through the mortgage origination process, you can still receive offers that have rates as low as the traditional loans. That is true even with all of these other benefits in mind as well. As an additional bonus, you do not receive a prepayment penalty when you start to pay down some extra debt when your income levels rise either. That means you can eventually have more control over your housing investment without potentially worrying about making the payments since they must result in a better outcome for you.
10. You may be able to subordinate a second mortgage with this product.
Although the FHA streamline refinance process does not allow you to include or payoff a second mortgage with this lending product, you may be able to subordinate your second using this loan. Your mortgage lender will guide you through the unique process which applies to your financial situation. As with any lending product, it is essential that you shop around and begin to compare options to ensure that you’re working with a lender that is reputable and trustworthy.
List of the Cons of FHA Streamline Refinance
1. You must pay the closing costs and mortgage insurance premiums.
Although there are some lenders who will offer options that require no out-of-pocket expenses, this benefit only applies to loans which do not require private mortgage insurance. You must be able to cover the closing costs of this refinance because the FHA does not allow them to be included in the final mortgage tally, nor can the PMI be rolled into it. That means you must have enough cash on-hand to cover these expenses to take advantage of the long-term benefits of your refi.
2. No-closing cost options almost always have a higher interest rate.
If you can pay for the closing costs for the FHA streamline refinance, then you should do so because the option that eliminates this expense counters with a higher interest rate. When you read the terms of your mortgage contract, then you may also find that another refi is not allowed until a specific amount of time passes to ensure that the lender can make up for the expense. You are either going to pay now for the new lending product, or you are going to pay for it with every payment.
3. Your payments could actually go up after you refinance.
If you have a newer FHA loan and are thinking about the streamline refinance process, then you will want to evaluate your options very carefully. You can expect that your annual premiums and upfront costs are going to be higher. That also means that your monthly payment terms might rise as well. Although you may benefit with terms that are more favorable in the long run, you will need to evaluate the health of your financial situation before pursuing this option because the final costs might be significantly more than you may anticipate.
4. It is not available to you if you are behind on your payments.
You must have your current mortgage up-to-date with payments if you want to qualify for an FHA streamline refinance. If you have missed a payment or two and haven’t managed to catch them up yet, then you will not receive an approval with your application. Even if your financial situation would be better with an approval, the first step in this process is to ensure that your payments are current with your traditional mortgage.
5. The loan terms for the FHA streamline refinance are struct.
The FHA streamline refinance program uses several strict restrictions to limit who can apply for this lending product in the first place. Only homeowners who have an FHA loan in the first place will qualify for this opportunity. You can still refi a non-FHA loan, but it cannot be through this program. If you have an adjustable-rate mortgage and want one that with a fixed rate, then your balance cannot increase after the final terms are set. Then you cannot cash-out with this product either, since only $500 in proceeds is permitted.
6. There are loan limits to consider with this lending product.
The FHA streamline refinance program limits the size of the mortgage that qualifies for better rates, with loan limits depending on the cost of living in your geographic location. For some homeowners, the maximum amount that they can refinance through this program is just under $315,000. If you live in a high-cost area, then you may be able to have a cap of $726,000 for a single-family home or a condominium.
Residents of Hawaii, Alaska, Guam, and the USVI have even higher cap limits, set at $1.08 million for single homes.
7. You are required to carry mandatory mortgage insurance with the refinance.
When you take advantage of the FHA streamline refinance program, then you are required to carry mandatory mortgage insurance as part of the loan. This rule applies even if you didn’t have PMI on your lending product before. That is one of the reasons why some homeowners would see their monthly payments rise under this program, which would then negate their ability to qualify for this product. The only ways that you can get rid of this disadvantage is to refinance out of the FHA or pay your mortgage in full.
8. The original mortgage cannot still be in its introductory rate.
If you decided to purchase your home using an adjustable rate mortgage, then your lending product must be out of its introductory rate with FHA before you can take advantage of the streamline refinance benefits. If you purchased your single-family home or condominium using a 7/1 or 10/1 product, then it could be 12-36 months (or longer) before you qualify for an application instead of the six-month mandatory wait time for other products.
9. It may not be possible to afford the closing costs for some families.
Even with the financial gains that come with the FHA streamline refinance loan, the closing costs for this program can range anywhere from $1,500 to $6,000. You would then need to add the insurance costs that are necessary to begin that policy to the final tally as well. If you do not have access to a no out-of-pocket loan in your geographic area, then the upfront cost of this lending product may exclude some homeowners from being able to participate in this program even though they qualify for it.
10. There is still a lot of confusion about what is or is not permitted.
The U.S. government has changed the requirements for the FHA streamline refinance process several times since 2014. There was minimum credit score requirements in the past, income or employment stipulations consider, and even a wait time of 210 days before you could apply. At one point during this program, you had to prove 12 consecutive on-time payments with your mortgage before being considered as well. If you search for the pros and cons of FHA streamline refinance online now, this old content still receives top billing. That can create a lot of confusion for homeowners, which is why speaking with a mortgage specialist is often necessary to determine what is available for your current needs.
If you are thinking about the pros and cons of the FHA streamline refinance program, then it is important to know that your existing loan must be at least six months older before you can apply for this option. You must have made at least your last three mortgage payments on time. If there are costs associated with this lending product, then you must pay for them with cash on-hand unless you opt for a higher interest rate in certain situations. If you qualify, then your mortgage payment receives a reduction of at least 5%.
About the Author of this Article
Natalie Regoli is a seasoned writer, who is also our editor-in-chief. Vittana's goal is to publish high quality content on some of the biggest issues that our world faces. If you would like to contact Natalie, then go here to send her a message.