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With mortgage rates hitting all-time lows, millions of Americans are considering refinancing their homes. According to Freddie Mac, refinance activities increased by 6% percent among first-time homeowners in the opening months of 2020.
Those who have an FHA Loan have the option to refinance through the FHA Streamline Refinance program. This option is designed to help first-time homeowners take advantage of lower interest rates based on their payment history.
Here’s what you need to know about FHA Streamline refinancing and when you should consider moving forward with this option.
The FHA Streamline Refinance Program
As an alternative to conventional loans, FHA-insured loans are targeted toward first-time home buyers. FHA loans require a minimum down payment of 3.5%, with easier credit qualifications and lower closing costs.
The FHA Streamline Refinance program allows individuals and families with an FHA-insured loan to take advantage of lower rates with minimal paperwork. Instead of going through a credit check and income verification process, the FHA accepts a perfect on-time payment history as evidence the homeowner can re-qualify for a loan.
Homeowners with current FHA loans will find streamline refinancing is comparatively faster and easier than traditional refinance options.
“If the homeowner has made their payments on time over a period of time, they have pretty much done everything they need to do to qualify for the mortgage,” says Bill Banfield, executive vice president of capital markets at Quicken Loans. “If you’ve already been able to make your payments at the existing interest rate that you have, and can get an interest rate that’s a half-percent or more lower, you can use the FHA streamline refinance program and get the lower rates available on the market.”
Compared to a conventional mortgage, the FHA streamline process allows homeowners to skip many traditional refinancing requirements, including income verification and home appraisal. The process enables homeowners to save time and money.
For example, home appraisals can cost up to $600, which are added to closing costs. With an FHA streamline refinance, homeowners can skip the step, and ultimately reduce their out-of-pocket costs.
Must have an FHA mortgage: To qualify for an FHA streamline refinance, homeowners must already have an FHA-insured mortgage. Those with conventional mortgages do not qualify, while borrowers with VA Loans qualify for a different option: The VA Interest Rate Reduction Refinance Loan.
On-time payment history: Because the FHA streamline refinance qualifies homeowners based on making their monthly payments on time, the loan must be current. A history of late or missed payments could disqualify homeowners from the streamline refinance.
FHA refinance must prove beneficial for the homeowner: When the FHA streamline refinance is complete, the homeowner needs to be in a better financial place. This may be a reduced monthly payment, fewer years on the mortgage, or going from an adjustable-rate mortgage to a fixed-rate mortgage.
The Difference Between FHA and Conventional Refinance
There are several key differences between FHA streamline refinancing and traditional, private loan refinancing. The table below shows the major differences between the two.
|FHA Streamline Refinance||Private Loan Refinance|
|No credit check||Credit check required|
|No income verification||Income verification required|
|No appraisal needed (in most situations)||Appraisal required|
|Cash-out limited to $500||Cash-out from home equity available|
|Must have an existing FHA mortgage||Can have an FHA, VA, or conventional mortgage|
|Must pay 1.75% percent fee to FHA (upfront mortgage insurance premium).||No additional payment required|
|For homes with a loan-to-value ratio over 90% percent, homeowners must pay mortgage insurance||Homeowners won’t need to pay mortgage insurance once loan-to-value reaches 80% percent|
Is the FHA Streamline Refinance Right For Me?
For homeowners who already have an FHA mortgage, the FHA streamline refinance option may present a frictionless way to move into a new loan. Because of its flexibility, homeowners can quickly move from one loan to another, closing on a lower interest rate and payment in a few weeks.
“The streamline option comes with the flexibility where you can literally just come in and drop your rate,” says Banfield. “There’s a huge amount of FHA clients that will do the streamline because it’s the fastest, easiest option for them to lower their monthly payment.”
Streamline mortgages can also help those who have experienced hardship from when they first bought their home. In situations where homeowners are making less, or their homes may have lost value, an FHA streamline refinance can help them get into a lower rate when they may not necessarily qualify for a traditional loan.
“An FHA streamline refinance is a great option for someone who has a complicated income structure or whose income may have declined since purchasing their property,” says Victoria Kiser, senior loan officer at online mortgage lender Embrace Home Loans. “While employment is verified with this type of refinance, income is not verified.”
However, an FHA streamline refinance may not be for everybody. Homeowners who have improved their credit after purchasing their home or want to cash out from their equity may be able to get more favorable options from a conventional mortgage refinance. The new credit check could prove a better interest rate than opting for the no credit check streamlined process.
If the homeowner has improved their income, or improved their credit history, “there’s no real reason to do a streamline,” says Seth Feinman, vice president of New York-based mortgage lender Silver Fin Capital Group. Even without an FHA streamline loan, Feinman says some properties may qualify for an appraisal waiver, which can save the homeowner in closing costs. Those who have a newer home, improved credit, and would like to explore buying points to reduce the interest rate may want to consider a traditional refinance instead.