For those who have a mortgage but plan to refinance it, FHA streamline loans, often called FHA streamline refinancing, is a key opportunity. The term streamline refers to the process of securing the mortgage – it tends to be faster and requires less of the paperwork and requirements of a traditional FHA loan. There are numerous advantages to these loans, and some limitations as well. For those who own a home and want to secure a better interest rate or terms, it can prove to be an attractive option overall.
What Does an FHA Streamline Loan Offer?
The process involves refinancing an existing FHA loan. Many people have FHA loans because they tend to be easier to obtain with lower down payment and credit score requirements. Yet, over time, new interest rates and term opportunities may arise, encouraging the property owner to want to refinance an existing loan into a new one. That is where the FHA streamline loan can work. It lets the borrower refinance the mortgage with limited additional credit documentation and speeds up the underwriting process.
It’s important to note that streamline FHA mortgages still require qualifications. Not everyone with an FHA loan can use them. Also, the term streamlining only refers to the reduced amount of paperwork involved. There are still other factors to consider, including costs associated with the process. Take a look at some of the key factors that apply to this type of loan opportunity.
What Are the Benefits of an FHA Streamline Loan?
Many property owners can benefit from the streamline refinancing program. While there are eligibility requirements, if a property owner qualifies, it will offer key benefits including:
No Appraisal Requirements
A key advantage of these loans is that the property owner does not have to secure a new appraisal on their property in most cases. Instead, the FHA allows the owner to use the original purchase price of the home as the current value of the home. As a result of this, homeowners do not have to worry about making repairs or updates to their homes before meeting an appraiser. It also means there is no cost associated with appraisals.
In some cases, homeowners who have an underwater mortgage – one in which they owe more money on the loan than the home is worth – can also use the FHA streamline refinance. This means many who otherwise could not secure a new loan may be able to do so using this method.
No Income Verification
The Streamline process also enables limited verification of data regarding income or employment. Unlike in securing a traditional home loan, where documents need to be verified to establish income and employment, the rules here are a bit more lenient. In some cases, being underemployed or unemployed may not limit a person’s ability to secure this type of loan.
Less Paperwork Means Faster Results
With fewer documents to sign and navigate, the entire process of securing this type of loan refinance is far easier than a traditional home loan. FHA streamline loans tend to be able to be completed in a matter of weeks rather than the month or more that’s typical of these types of loans. It is important to know that some documentation is necessary – the process does not take just a day.
Reduced Credit Score Requirements
Most of the time, consumers will find that FHA streamline refinance loans are a bit easier to qualify for than the original FHA loan they secured. While the loan itself does not require credit qualifications outright, some lenders will place a minimum score on the loan. That means the lender – who will provide the FHA streamline loan – may determine some credit scores are too low and not agree to the terms. Most of the time, a credit score requirement of 620 is in place.
Interest Rates Are Competitive and Tend to Be Very Affordable
While there are various reasons to refinance an FHA loan, the key reason many do so is to capture a lower interest rate. Interest rates on FHA streamline loans are the same as they are on FHA loans. The current interest rate available is set by the lender of the loan, not FHA itself. However, because of the government backing the lender receives from the FHA, they are often able to offer the lowest interest rates available, with some limitations.
Paying It Off Early Is an Option
Another key aspect to consider in any home loan is whether or not it can be paid off early. Though loan terms can fluctuate from time to time, most FHA streamline loans have no prepayment penalty. That means the homeowner can pay off the loan in full at any time.
Who Qualifies for an FHA Streamline Mortgage?
To obtain an FHA streamline loan, current property owners must meet specific guidelines set by the Federal Housing Administration. Most lenders can provide insight to help homeowners determine if they qualify rather quickly. Here are some of the rules.
The Existing Mortgage Must Be an FHA Loan
It is possible to refinance a conventional (non-FHA) loan into an FHA loan. However, it is not possible to do this through the FHA Streamline loan process. The streamline option is meant to be a fast and easy way for existing FHA loan holders to secure a new set of terms for their loan. For those with a conventional loan, applying for an FHA loan will require traditional verification of income, employment, credit scores, and so on.
The Existing Mortgage Must Be Up to Date
FHA streamline mortgage loans are available to consumers who have a current mortgage. They define that as a loan that has not been late by 30 days or more in the past six months. They also have to have had their existing mortgage in place at least 210 days to qualify for this streamline refinancing offer. Lenders can ultimately decide whether or not to offer these loans even to those who have never missed a payment. For example, if a person has missed a payment, but it has been more than six months, some lenders may not approve these individuals for a loan.
The Process Must Produce a Benefit
One of the unique aspects of the FHA streamline loan is that the process must offer some clear benefits to the consumer. The borrower must benefit in some way from this type of loan refinancing. There are several potential benefits it can offer.
- Refinancing may extend the terms of the loan, allowing for a lower monthly payment.
- Refinancing with the loan could mean securing a lower interest rate on their home loan, which saves money over time.
- The consumer may need to secure new terms due to changes in income or improved credit scores.
In some situations, using an FHA refinance like this could mean that the consumer is no longer at risk of default, which means FHA may no longer be responsible if the property owner defaults on his or her loan.
One key situation involves a reduction in the term limit. For this to be seen as a positive benefit to the consumer, the remaining amortization period of the current loan must be reduced. Besides, the principal, interest, and mortgage insurance protection payment for the new loan must not be more than the combined amount of the existing mortgage debt.
It is important to know if a borrower qualifies before refinancing. That is why most lenders will work with the homeowner early on to ensure they are eligible for the loan and that the refinancing makes financial sense for them. This can be done in a simple consultation with the lender or loan specialist.
For those who may not be eligible for an FHA streamline loan, it may still be possible to refinance the FHA loan through traditional methods. This may make it a bit harder to qualify, but it can offer additional benefits to property owners as well, including the ability to pull cash out.
What Else to Consider About FHA Streamline Loans
There are a few other key aspects of FHA streamline loans that borrowers must keep in mind if they are considering using this option to secure a new loan.
No Cash-Out Available
In many areas, consumers have seen their home values increase. As a result of this, many people have equity. This is the amount of money left over when the current value of the mortgage is subtracted from the value of the home. For example, if a home is worth $200,000 right now, and the homeowner owes $150,000 on the loan, this creates $50,000 worth of equity.
However, with streamline FHA loans, there is no cash-out opportunity. This means that borrowers cannot take out more than $500 in cash from the refinancing process of their loan. The $500 is only allowable because it helps cover unexpected costs associated with securing the loan itself.
For those that have equity and that want to use their equity, there are other types of refinancing opportunities that may allow for access to the equity. The key here is that the homeowner needs to go through all the paperwork and verification then since they cannot use the FHA streamline loan.
There Are Costs Involved
FHA streamline loans are not free to complete. There are closing costs involved in the process. The amount of the closing costs tends to be significantly lower than in a traditional loan refinance, though. Closing costs may include things like title fees, origination fees, and similar costs. They tend to be a fraction of the value of the original closing costs on the loan. The lender can provide details about what these costs are at the time of applying for the loan, providing clarity within the process. The other factor to consider is paying for those closing costs. Unlike other types of mortgages, it is not possible to roll closing costs into the FHA loan itself. These must be paid, generally out-of-pocket, at the time of closing on the loan.
Upfront Mortgage Insurance Premium
One of the key things to speak to the lender about for those who plan to use an FHA streamline loan is paying mortgage insurance premiums upfront. These are generally a requirement for these loans. The costs are paid both upfront at the time of the closing of the new loan as well as through monthly payments. This fee can range but is typically 1.75 percent. For those with an FHA loan that was established before April of 2009, the upfront premium is reduced to just 0.01 percent. It is possible to wrap the upfront costs of this fee into the loan terms.
How to Determine the Benefits of an FHA Streamline Loan
For those homeowners with an existing FHA loan, the opportunity to use a streamline refinance for it can be attractive. It is faster and easier to do. It allows the property owner to secure new terms, which may mean paying less to buy the home through reduced interest or having a lower monthly payment. However, property owners will need to determine if the costs are worthwhile.
One of the best ways to know if this is the right option is to use a mortgage calculator (with or without the lender’s help). This can provide information about what the expected loan term is, interest rates, and monthly payments. It also breaks down the potential savings that the property owner receives when he or she refinances the loan. It can pinpoint factors to help show if the move is worthwhile.
For those with a high-interest rate or those having trouble making monthly payments, refinancing using an FHA streamline loan can work very well. It can provide an opportunity to reestablish the loan and build credit, too, with on-time payments over the life of the loan. However, every situation is unique, and consumers must determine if this is the right option for their needs.