The Many Advantages of an FHA Streamline Loan

Refinancing your home is a tempting choice, but it shouldn’t be taken lightly. Many factors have to be taken into consideration, including your financial standing, your savings, the value of your home, and your equity. As complex as that decision is, there are several options for homeowners as well – each possible refinancing option is best for a certain situation, and it can be difficult to navigate them.

Beyond making sure that it’s the right time to refinance, homeowners interested in taking out a refinance-oriented loan must also take a no-nonsense look at their financial situation and find the right choice. Homeowners must also meet the requirements to be considered for an FHA streamline refinance loan if that is the option they are considering.

What Exactly Is an FHA Streamline Loan?

To define an FHA Streamline loan, you first have to know what FHA loans are.  FHA (Federal Housing Authority) loans are provided by an FHA-approved vendor and insured by the FHA, making them some of the most secure mortgage loans available. Designed for middle to low-income homeowners, FHA loans usually require lower down payments and credit scores than other types.  Assuming you meet the minimum requirements, an FHA loan is a great way to become a homeowner on a more limited budget.

An FHA streamline loan allows borrowers that meet certain basic requirements to have an easier time getting a refinance loan, and get better terms on that loan. One of the biggest benefits of the FHA streamline refinance program is that the borrowers can skip over the initial income, savings and equity verifications that come with conventional refinance loans.

In some cases, FHA streamline loans allow the borrower to bypass an appraisal on their current home, which is often a major sticking point in a refinance approval. This aspect certain can vary according to how much they’ve paid toward their original loan balances. FHA streamline programs have a great advantage for some homeowners because they allow some borrowers who are “underwater” on their loans to get their heads back above water by offering lower interest rates and monthly payments.

What Are the FHA Streamline Requirements?

Because of the many advantages FHA streamline loans offer, the requirements to qualify for an FHA streamline refinance loan are quite strict. They include:

• The refinanced home must be the borrower’s primary residence.
• There can’t be more than two late payments in the past year.
• There must be an existing FHA loan on the house.
• The loan must be a minimum of six months old to qualify for FHA streamline program participation.
• There has to be a real benefit to the borrower as a result of refinancing.
• The borrower may not receive cash exceeding $500 from the proceeds of the streamline refinance process.

While it is possible to get financing through the streamline loan program the FHA offers without an appraisal of the home, if the new loan doesn’t exceed the previous loan by 1.5 percent or more, there are some situations where this isn’t the best more. If the borrower gets an appraisal, for example, closing costs can be included in the loan, but this is not an option without the appraisal.

What’s the Difference Between a Streamlined and Non-Streamlined Refinancing Loan?

Whereas a streamline loan allows borrowers to refinance their existing loan on generous terms to reduce payments, a non-streamlined refinancing loan allows borrowers to cash based on the size of the equity on their homes. For this reason, they are often called “cash-out refinance loans.”

Cash-out refinancing loans are only truly useful in very specific situations, such as when homeowners have sufficient equity in their homes to make it worthwhile. For borrowers who are underwater on their homes (who owe more than the value of the house), a cash-out loan won’t be a viable option, but they will benefit from lowering their payments using an FHA streamline loan, and vice versa. It is not necessarily wise to do so with a non-streamlined loan as most borrowers will not have adequate equity in their home within six months to make this feasible.

If the borrower has a reasonable amount of equity in their current home and doesn’t need to reduce monthly payments, though, a cash-out loan is a good option to get some quick cash. This is especially true when cashing out allows homeowners the opportunity to reduce higher interest debts, like credit card debt.

Unlike some more strictly structured loans, a distinct advantage of a non-streamlined refinance mortgage is that the money received from the cash-out loan can be used for whatever purpose the borrower likes. It can be used to pay off a student loan, buy back a debt, remodeling or buying another property, or borrowers could even leave it in the bank to earn interest. This may not be the sexiest use for the money, but it is an option. Some others include:

• Luxury vacations.
• Reducing debt.
• Investing in a business.
• Other real estate investments (vacation properties, investment properties, etc.).
• Paying large one-time expenses.

No Cost Streamline Loans

Lenders can offer streamline refinance loans without the backing of the FHA for their homes without paying anything out of pocket. Even though this might seem like a great deal, a loan without FHA insurance is not always the best choice.

Loans without the FHA backing, that is, directly from a lender, will have higher streamline refinance rates for interest, although it has less strict requirements. In this case, borrowers willing to pay higher FHA streamline refinance rates to reduce their overall interest burden and monthly payments may find this attractive.

Anyone interested in a refinance should compare FHA and lender streamline refinance rates to make sure that they do not lead to a much higher price of the home in question – it’s all about finding the most appropriate borrowing situation for your financial situation and needs.

Another consideration for those who have made it past the initial stage of mortgage payments where mortgage insurance premiums are required is that, if the home’s equity drops as a result of the loan, they may need to purchase insurance all over again. The end result of this situation is that borrowers could end up paying higher costs all around if the FHA streamline refinance rates are larger than expected.

Ultimately, the no cost part of the claim is somewhat misleading because borrowers are still required to pay closing costs – they’re just rolled into the loan.

Only individual borrowers can answer the question of whether or not FHHA streamline refinancing loans are the right choices for their needs. It is much easier to do, though, when they make that decision armed with all the facts about the loans, interest rates, costs, fees, etc. Then borrowers can determine if these goals help them meet their short and long-term financial goals better.