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The FHA Streamline Refinance Program Explained
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If you’re looking to refinance and already have a loan backed by the Federal Housing Administration (FHA), you’re in luck — the FHA streamline refinance program can help make your refinance quick and painless. It doesn’t require income or employment verification and has no minimum credit requirement, making it a hassle-free way to access lower interest rates and reduce your monthly mortgage payments.
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What is an FHA streamline refinance?
The FHA streamline refinance is special because it allows you to refinance while putting your personal finances through less scrutiny. As long as you already have an FHA-backed loan, you’re offered a refinance that is guaranteed to provide solid financial benefits. This method of refinancing might be right for you if you want to:
Reduce your interest rate You can replace a current FHA mortgage with a lower-interest-rate loan.
Pay your loan off faster You can replace your mortgage with a shorter, 15-year fixed term as long as your interest rate doesn’t increase and your new monthly payment doesn’t jump by more than $50.
Switch to a less risky loan You can replace, for example, an adjustable-rate mortgage (ARM) with a more predictable fixed-rate mortgage.
There are two types of streamline refinances: credit qualifying and noncredit qualifying. A noncredit qualifying refinance doesn’t require a full credit check, which can make it an attractive option for those whose credit has taken some significant hits.
A credit qualifying refinance, on the other hand, is a more traditional option that could allow a borrower to roll closing costs into the loan but doesn’t allow you to skip the income verification and debt-to-income (DTI) ratio steps the way a noncredit qualifying refinance does. This can be a good choice for those who have improved their credit score since taking out their first loan, and it’s the only option for those who want to remove a borrower from a loan when refinancing. In these cases, the FHA will utilize a full credit report.
Generally speaking, you can’t find a mortgage lender that will give you a loan for more than the value of a home. This can make it really tough for “underwater” homeowners — people who owe more on their mortgage than their home is currently worth — to refinance. For this reason, the fact that an FHA streamline doesn’t require you to get a new home appraisal is a huge perk. The FHA will use the home’s purchase price to calculate your loan-to-value (LTV) ratio. On top of that, you’ll also save hundreds of dollars in appraisal fees and be able to complete the closing process faster.
6 steps to getting an FHA streamline refinance
Although the streamline refinance program makes a refinance relatively simple, there are still requirements to meet, including an evaluation of your financial situation. The good news is these rules aren’t designed to weed out people with low credit or precarious finances, but to ensure the program helps them. The main steps your lender will take to evaluate your situation before issuing you a new FHA loan are:
1. Verify that you already have an FHA loan If you’re unsure about whether your current home loan is an FHA loan, check your monthly mortgage statement or deed of trust for an FHA case number. If you’re still not sure, contact your lender.
2. Check your mortgage payment history A mortgage-only credit report will provide details about your payment history. The most important factor is whether you’ve had any late payments in the last 12 months. If you’ve had your mortgage for less than 12 months, you must have made on-time payments the entire time.
3. Check your credit score You don’t have to meet a minimum credit score if you want to go with a noncredit qualifying refinance, but if you’ve improved your credit since you purchased your home, you should consider a credit qualifying refinance — you could save a lot of money in interest by disclosing that more robust credit score. Your credit report will also show any late payments you may not know about, as well as give you a chance to dispute any inaccuracies on your report.
4. Verify that your waiting period is over At least 210 days must have passed since your original FHA mortgage was closed, and you must have made at least six payments, before you can move ahead with a streamline refinance.
5. Pass a “net tangible benefits” test The FHA wants to ensure you’ll benefit from a refinance, so it has what is called a “net tangible benefit” requirement. To meet the requirement, you must benefit from an FHA streamline by:
→ Lowering your rate by 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.
6. Have enough cash to close Because you can’t fold FHA closing costs into an FHA loan balance, you’ll only be able to take out a loan big enough to cover the interest and mortgage insurance premiums on your current mortgage. For the rest, you’ll have to prove to the lender that you have enough cash to cover the closing costs. These closing costs can also be paid with a gift from a relative, close friend, employer, government housing agency or charitable organization.
What documents do I need for an FHA streamline refinance?
Each lender may have slightly different ways of verifying your information, but typically you’ll need:
- Mortgage verification documents. You’ll likely need a mortgage statement, FHA mortgage note, closing disclosure and settlement statement from your original FHA loan.
- Employment documents. You may need to show documents that verify your employment, though proof of employment and proof of income are not required.
- Financial documents. The FHA will need proof that you have the funds to cover your closing costs. This could be bank statements or other documentation of money you received from family members, government programs or nonprofits to help you cover closing costs.
- Residence documents. Whether the home is a primary residence, rental property or vacation home is important. Utility bills, tax returns, driver’s license or other similar documents are common ways to prove a primary residence.
- Closing documents. The FHA will need to know your case number and other details of your loan, which are contained in the paperwork from your original closing.
Tips for rolling closing costs into an FHA streamline refinance
Use a no-cost refinance The FHA streamline refinance rules don’t let you increase your loan amount to cover typical closing costs. However, you may be able to find a no-cost streamline refinance lender that will pay the costs on your behalf if you agree to a higher interest rate on the loan. Ask the lenders you shop with if this is an option.
Factor in your UFMIP refund If it has been three years or less since you closed on your original FHA loan, you can get a portion (up to 68%) of the upfront mortgage insurance premium (UFMIP) you paid refunded when you do a streamline refinance. The refund is applied as a credit to the UFMIP due on your refinanced loan. The UFMIP refund chart below shows how much you’ll receive based on how long ago your first loan closed:
Pros and cons of an FHA streamline refinance
| Pros | Cons |
|---|---|
Can result in lower payments You aren't required to provide income documents Employment verification is not required Your other debts won’t be considered You won’t need an appraisal You’ll provide less documentation and likely have a faster turnaround time You’ll pay lower closing costs (there’s no appraisal or credit report fee) You can add a borrower to the loan without a credit check You can use it for a primary residence, vacation home or a rental property No FHA prepayment penalties | You must have a current FHA mortgage You won’t qualify if you haven’t made six consecutive payments on your current FHA loan You can’t remove a co-borrower except in cases of divorce, legal separation or death You can’t take more than $500 cash out You’ll have to pay another upfront mortgage insurance premium and continue to pay annual mortgage insurance You’ll have to pay closing costs |
Things you should know
FHA loans issued on or before May 31, 2009, require an upfront premium of only 0.01%, which is significantly lower than the upfront premium of 1.75% required of all loans originated after that date.
How do I get the best FHA streamline refinance rates?
Don’t feel stuck with your current lender — you can refinance with a different one if you’d like. Comparing the rates of at least three to five different FHA-approved lenders will help you find out which lender can offer the best FHA streamline rates for you. Try a rate comparison site, and call your current lender to see what terms it offers.
Tip. If your original mortgage closed between 2010 and 2015, you’ll enjoy a significantly lower annual mortgage insurance premium (MIP) after refinancing. That’s because the Federal Reserve took action in 2015 to reduce the cost of annual MIP payments, which had risen more than 145% between 2008 and 2013.
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.
Is an FHA streamline refinance a good idea?
Conventional loan vs. FHA streamline refinance
If you’re trying to decide whether to go with a conventional loan or an FHA streamline for your refinance, know that FHA interest rates may be lower, but the APRs will likely be higher. Because of that, you should probably go the conventional route if you can, especially if you have enough equity to avoid paying for private mortgage insurance (PMI). However, if you don’t have at least 20% equity and a minimum 620 credit score, an FHA streamline refinance is a solid choice.
Cash-out refinance vs. FHA streamline refinance
If you’re debating between a cash-out refinance and an FHA streamline refinance, here are some pros and cons to consider:
| Cash-out refinance | FHA streamline refinance | |
|---|---|---|
| Your current income, debt and credit scores must qualify | ||
| Home appraisal required | ||
| You must be refinancing an FHA mortgage | ||
| Your loan amount, mortgage rate and payments could increase | ||
| You can access a significant amount of cash to put toward other financial goals |