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The FHA Streamline Refinance Program Explained

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If you currently have a loan backed by the Federal Housing Administration (FHA) and want to save money on your monthly mortgage payment with less hassle, consider an FHA streamline refinance. Even if your income or hours have been cut due to the coronavirus pandemic, there’s good news: The FHA streamline refinance doesn’t require income or employment verification.

What is an FHA streamline refinance?

The FHA streamline refinance is a unique program available only to homeowners with a current FHA loan to refinance quickly with less paperwork. Typically, borrowers opt for the FHA streamline mortgage to:

• Replace an existing FHA mortgage with a lower interest rate loan.
• Pay their loan off faster with a shorter 15-year fixed term.*
• Switch to a safer product, for example, converting from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

Because the FHA streamline refinance program doesn’t require a full credit check, it may be a good refinance option if you have bad credit. However, FHA-approved lenders may require a mortgage-only credit report, and the higher your credit scores are, the lower your interest rate will be. To improve your scores, pay bills on time and keep credit card balances low.

*The new rate must be lower than your current rate and the new monthly payment can’t increase by more than $50.

4 steps to getting an FHA streamline refinance

FHA streamline guidelines are fairly simple. There are usually four steps lenders follow to determine eligibility:

  1. Verify you have an FHA loan. Your monthly mortgage statement should indicate if you have an FHA loan. If you look at your deed of trust, there will be an FHA case number if the loan is insured by FHA. If all else fails, an FHA-approved lender can check the FHA status of your home.
  2. Check your mortgage payment history and credit score. The lender will verify your mortgage payment history and credit score with a mortgage-only credit report (a report that looks solely at your mortgage payment history) to make sure that:
    • There are no late payments in the most recent six months.
    • It’s been at least 210 days since you took out your current FHA mortgage.
    • You haven’t been late more than once in the past 12 months.
  3. Pass a benefits test. You must benefit from an FHA streamline by:
    • Lowering your rate at least a half percentage point (0.5%). For example, if your current interest rate is 4%, the new rate must be 3.5% or lower.
    • Refinancing an ARM to a fixed-rate loan.
    • Choosing a shorter term, such as a 15-year fixed mortgage, to pay off your loan sooner.
  4. Have enough cash to close. Because you can finance only the interest and mortgage insurance premiums due on your current mortgage, you’ll need to verify you have enough money in your bank account to cover FHA closing costs for a streamline refinance. The closing costs can also be paid with a gift from a relative, close friend, employer, government housing agency or a charitable organization.

Tip for rolling closing costs into an FHA streamline refinance

FHA streamline rules don’t let you increase your loan amount to cover typical closing costs. However, there may be no-cost FHA streamline refinance lenders who charge you a higher interest rate and pay the costs on your behalf. Ask the lenders you shop with if this is an option.

Pros and cons of an FHA streamline refinance

To help you make an informed decision about whether an FHA streamline refinance is right for you, compare the pros and cons.

Pros
  • You won’t need to provide income documents.
  • Your employment is not verified.
  • Your other debts won’t be considered.
  • You won’t need an appraisal.
  • You’ll pay lower closing costs (there’s no appraisal or credit report fee).
  • You’ll provide less documentation and likely have a faster turn-around time.
  • You can use it for a primary residence, vacation home or a rental property.
Cons
  • You’ll have to pay a higher rate or get an appraisal to roll closing costs into the loan.
  • You won’t qualify if you haven’t made seven consecutive payments on your current FHA loan.
  • You must have a current FHA mortgage.
  • You can’t remove a co-borrower*.
  • You can’t take more than $500 cash out (typically only applies to no-cost refinance options).
  • You’ll pay a fresh upfront mortgage-insurance premium and continue shelling out monthly premium payments. The upfront premium is 1.75%, except for FHA loans originated before April 2009; those require an upfront premium of only 0.01%.
  • *Except in cases of divorce, legal separation or death, as long as the remaining borrower proves they’ve made payments for six months prior to the refinance application.

How do I get the best FHA streamline rates?

Comparing the rates of at least three to five different FHA-approved lenders will help you find a lender that offers the best FHA streamline rates for you. Try a rate comparison site or call your current lender to see what terms they offer.

You’ll receive a loan estimate within three business days of applying for a refinance loan. Once you narrow your choices to the right lender, get a mortgage rate lock to secure your rate.

 

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