For homeowners with plenty of equity, refinances look pretty good right now. Interest rates are still near historic lows, so if you bought your home several years ago and have built up home equity, you may be able to save thousands of dollars by refinancing.
And if you have an FHA loan, you’re really in luck. FHA streamline refinance loans can help you take advantage of low rates and reduce your monthly payment even without a lot of equity.
And, they don’t require an appraisal or even income documentation in most cases.
What's in this Article?
The FHA streamline refinance program gives homeowners a quick and easy way to reduce their payments without extensive documentation and a lengthy application period. It replaces your existing FHA loan with a new one, if there’s a financial benefit of doing so.
FHA streamline advantages include:
- You can drop your rate and payment if rates are now lower
- No appraisal is required in most cases
- You can refinance even if you owe more than the home is worth
- The lender won’t verify your current income level
- You may be entitled to an FHA MIP refund if you are refinancing your current FHA-insured mortgage within 3 years, which goes toward reducing the MIP on the new loan. It is important to note that the MIP can change annually
“This streamlined process is intended to be quicker than a regular refinance and requires less paperwork,” said Benjamin Stenson, CEO of The Norsemen, a home remodeling company in Louisville, Ky.
An FHA streamline refinance can lower your payment, with less time and closing costs invested. It also changes your loan term.
Terms of 15, 20, 25, and 30 years are typically available, but options will vary from lender to lender. These options may extend or reduce your home loan term, depending on where you are in your existing loan term. If you’re five years into your mortgage, for instance, you should calculate whether you actually save money in the long run.
Additionally, you’ll still have FHA mortgage insurance on the new loan. Homeowners with 20% or more in equity may want to apply for a conventional loan and get rid of mortgage insurance altogether. This option, however, requires an appraisal, plus income verification.
One of the biggest advantages of an FHA streamline refinance is that there is no home appraisal requirement.
Appraisals can cost $500 or more and must be conducted by an independent, FHA-approved appraiser, which can take a weeks. This benefit that can save you time and money.
You can also use an FHA streamline refinance on several property types, as long as the home is your primary residence. These loans may be applied to single-family homes, multifamily homes with up to four units, both attached and detached planned unit developments, and attached and detached condos.
Importantly, the FHA does not require condo project approval as part of the streamline refinance application process.
FHA streamline refinance criteria
- You must be current on your existing FHA mortgage
- You must have made at least six consecutive payments on your current mortgage
- At least six full months must have passed since your first due date on your loan
- At least 210 days must have passed since you closed on the loan you are refinancing
- You must also have made on-time payments for at least three months
- The property must be your primary residence
- Your home cannot be in foreclosure
- You cannot be delinquent on property taxes or homeowners insurance
- You must have enough equity in your home to refinance
- You must demonstrate that that you will see a net tangible benefit from refinancing, such as reducing your interest rate (and therefore getting a lower monthly payment), reducing the repayment term, or changing from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage
- Your new loan amount cannot exceed the original amount you borrowed
An FHA streamline refinance is a rate-and-term refinance, meaning that it can be used to lower your interest rate or change your repayment period. It is different from an FHA cash-out refinance, in which you can borrow against the equity in your home.
A cash-out refinance will have a higher loan balance than your current FHA loan because you are borrowing more than you currently owe.
But a streamline refinance may reduce your payments and the amount you will pay overall, if you are getting a lower interest rate.
FHA mortgage insurance premium (MIP)
Like FHA purchase loans, FHA streamline refinances have an upfront and annual mortgage insurance premium.
The following figures were correct at the time this article was published. MIP can change annually.
The upfront MIP for FHA streamline refinances is 1.75% of the loan amount. That equals a $1,750 lump sum for each $100,000 borrowed. This is payable in cash at closing, or can be rolled into the new loan amount.
If you received your current FHA loan within the last three years, and refinance with an FHA streamline, you may be entitled to an FHA MIP refund. The refund is not paid to you in cash, but reduces the upfront FHA MIP on the new loan.
For instance, if your new FHA MIP were $3,500 and you were entitled to a $1,000 MIP refund, the FHA MIP on the new loan would be $2,500. Ask your lender about your eligible refund if the FHA loan you are refinancing is less than three years old.
How much mortgage insurance you pay per month will depend on your repayment term and loan-to-value ratio (LTV). LTV represents your equity in the home vs how much you’re borrowing. So if you have 40% equity in the home, your LTV is 60%.
Most refinancing homeowners will pay around 0.80-0.85% of the loan amount per year, broken up into 12 monthly installments.
On a $250,000 FHA streamline refinance, that equals around $177 per month.
But since you are thinking of refinancing, consider canceling mortgage insurance altogether with a conventional loan.
If you have 20% equity in the home and a credit score of at least 620, you might also consider a conventional loan refinance. This product can allow you to replace your existing FHA loan with a conventional loan, which doesn’t require upfront or monthly mortgage insurance if you have enough equity.
A conventional refinance may even make sense if you get the same or even higher rate. Eliminating mortgage insurance is a big deal.
As mentioned above, FHA mortgage insurance is around $177 per month on a $250,000 mortgage. Even if your principal and interest payment stays the same or even goes up on a conventional loan, the mortgage insurance savings may make it worth refinancing.
|FHA Streamline||Conventional refi w/ 20% equity|
|Principal & Interest||$1,200||$1,225|
Getting rid of FHA mortgage insurance can do wonders for your monthly payment.
Just keep in mind that with a conventional refi, you would miss out on the easier qualification process of an FHA streamline refinance.
There are advantages and disadvantages to going with an FHA streamline refinance.
“It is much faster to refinance this way than with alternative refinancing options, and it is usually much cheaper, too, because it doesn’t require much verification,” said Leonard Ang, CEO of iProperty Management, an online resource for landlords, tenants, and real estate investors. “For these and other reasons, an FHA streamline refinance is recommended to borrowers who may not have the credentials worthy of a traditional loan.”
But all loans come with trade-offs. Your loan officer can talk you through your loan options when you apply, and they’ll help you choose the most affordable refinance plan.
|No appraisal is required||New loan amount cannot exceed your original mortgage balance|
|The closing process is faster than with traditional refinance loans||You cannot take cash out at closing|
|No proof of income level or home value is required||You’ll owe upfront and annual mortgage insurance premiums|
|You may be eligible for a partial refund of the upfront MIP on your current FHA loan||You must have an existing FHA loan to qualify for an FHA streamline refi. You cannot refinance from a conventional loan to an FHA streamline|
You will likely have to pay some of the closing costs out of pocket for an FHA streamline without an appraisal option.
Your new loan amount can’t exceed the original loan amount of your current loan. So unless you’ve paid down your existing FHA loan considerably, you’ll have to come up with some cash.
For example, you purchased a home with an FHA loan two years ago for $250,000. You now owe $247,000. But you have $4,000 in closing costs. You’ll have to come in to closing with $1,000 cash since the new FHA streamline loan amount can’t exceed $250,000.
If that’s a problem, you could opt to get an FHA streamline refinance with an appraisal. Then, your maximum loan amount is 97.75% of the new value. Let’s look at the same situation, then, supposing the home’s value is $260,000. You can wrap closing costs into the new loan, up to 97.75% of the value. In this case, you would be able to refinance without paying closing costs out of pocket.
There are a few reasons a regular FHA streamline would not work. The typical FHA streamline is considered “non-credit-qualifying” because you don’t have to supply income documentation.
Events that could trigger a “credit-qualifying” FHA streamline
- A change in the mortgage term results in a mortgage payment 20% higher or more
- Removing a borrower
- After a loan assumption, in some cases
In these cases, you may have to re-qualify for the loan. The lender will check your credit score, credit report, and debt-to-income ratio (DTI). When a credit report is utilized, it is typically a “Mortgage Only” report rather than a full credit profile history report. The purpose of a “Mortgage Only” credit report is to reflect your current credit score(s).
The requirements differ for credit-qualifying and non-credit qualifying. You’ll need a credit score of at least 600 for either option (as opposed to the 580 needed to qualify for an FHA purchase loan). You may be able to qualify with a lower score, though your lender may ask to see employment and income documentation.
You do not need to provide proof of income and employment with a non-credit qualifying streamline refinance, though you do if you take the credit-qualifying option. In some scenarios you will be required to take the credit-qualifying route due to your payment increase, or if you remove someone from the existing loan. When you are using the FHA Streamline Credit-Qualifying option, income will be required to be documented.
With a credit-qualifying streamline refinance, you must have a maximum debt-to-income ratio (DTI) of 50% and you may be required to have cash reserves (money that is readily available in a checking or savings account).
Although lenders do not need to review your credit or DTI for a non-credit qualifying streamline refinance based on FHA guidelines, your lender may opt to do so anyway when considering your application.
The non-qualifying option may seem like the obvious way to go, given that there are less hurdles to qualifying. But sometimes it’s not an option. Also, there’s this: “A credit-qualifying FHA streamline refinance can help you get a lower mortgage rate than a non-credit qualifying refi,” Solomon said.
Still, if your credit score has gone down recently and you’re concerned about being approved for the loan, try for the non-credit-qualifying option.
In either case, your lender will not approve you for a refinance loan unless there is a net tangible benefit, meaning that you will see substantial savings or some other gain. So even if you take the non-credit option, you’ll be in a better position than you are now.
The interest rate you will pay after choosing an FHA streamline refinance will depend on many factors.
FHA rates are generally very low, thanks to strong government backing for the loan program.
Your individual rate can vary, though, Stenson says. “Of course, it will depend on current market interest rates as well as additional factors that may affect your rate, such as your credit score, credit history, loan-to-value ratio, and more.”
But again, the interest rate on an FHA streamline refi must be lower than the interest rate you are paying on your existing FHA loan by at least 0.5%. So you are guaranteed to pay less in monthly interest in total interest over the life of your loan if you are approved for an FHA streamline refinance loan to lower your rate.
FHA streamline refinance FAQs
With an FHA streamline refinance, you pay off your existing FHA mortgage loan and take out a new FHA loan that either reduces your interest rate, changes your repayment term, or transitions you from an adjustable-rate mortgage to a fixed-rate loan. There is no appraisal requirement, and there is an option to apply without an income check, making the process typically faster and easier than you’d find with other refinance loans.
There are possible drawbacks to choosing an FHA streamline refinance. First, you won’t qualify unless you have an existing FHA loan. Your new loan principal cannot exceed your current loan’s borrowed amount, and you aren’t allowed to take cash out at closing (though that is an option with an FHA cash-out refinance).
Further, there is a mandatory upfront and annual mortgage insurance premium, and you will owe closing costs on the new loan.
The minimum credit score for an FHA streamline refinance is 600, though individual lenders may set higher requirements. You may be able to get an FHA streamline refinance approval with a lower score, but your lender may need employment and income verification at that point.
An FHA streamline refinance offers a fast and simple way to lower your mortgage rate and monthly payments.
“Because you don’t need to be employed to qualify, I would particularly recommend it if you have lost your job or are financially affected due to the pandemic,” Solomon suggested. “I would also recommend it if you have taken out an FHA mortgage loan before 2015, as a streamline refi can reduce your annual mortgage insurance premium rate from 1% to 0.85%. Just make sure you shop around with different lenders to find the best loan deal.”
“Your first reason to do a streamline refinance should be the desire to lower your mortgage interest rate and pay less,” he said. “Especially if you’ve been carrying an adjustable-rate mortgage, a fixed-rate streamline refi is definitely worth looking into.”
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.