If you currently have a FHA loan and you’ve wanted to take advantage of lower rates but have been worried about poor credit, insufficient home equity or falling income, you really need to take a look at the FHA Streamline Refinance program. For many streamline borrowers, there isn't an appraisal or full credit check. More remarkably, a refinance may require little or no cash up front.
As good as FHA mortgages are – and they are very good – borrowers may want new financing to take advantage of lower rates to reduce their monthly costs or to switch from adjustable to fixed-rate financing.
If you get a new FHA mortgage, you have to make two kinds of mortgage insurance payments: First, there's an up-front mortgage insurance premium (MIP) which for most borrowers today will be equal to 1.75 percent of the loan amount. Second, there's an annual mortgage insurance premium equal to 0.85 percent of the loan amount depending on loan amount, loan term and loan to value (see below for details).
As noted in the chart at left, FHA recently reduced the annual MIP for most new loans, thus reducing their costs. That equals a significant savings.
But how can existing FHA borrowers take advantage of the new policy as well as today’s lower rates?
The answer for many is the FHA Streamline Refinance program, which can lower your interest rate and reduce your annual mortgage insurance premium for only a small cost or possibly no cost for refinancing. For many FHA borrowers, it will be a chance to save money every month without a lot of expense or hassle and for most FHA borrowers that's a very good deal.
✔ No appraisal: The FHA does not require an appraisal on a streamline refinance, which is important because it means borrowers with little or no equity may be able to refinance. If an appraisal is obtained and the valuation is too low, FHA even says it can be ignored.
✔ No credit check: FHA does not require a minimum credit score and there's usually no full credit check or credit report review required.
When you first got FHA financing you went through a vigorous application process to show you could afford the mortgage, but with an FHA Streamline refinance you can forgot many of the hoops and hurdles associated with a new loan application. Here's what most current FHA borrowers need for a Streamline Refinance.
✔ You must now have an FHA-backed mortgage. The loan must be not less than 210 days old, meaning you have made at least six monthly payments.
✔ Payment history: If the loan is less than a year old, then the borrower must have made all payments within the month due. No late payments are allowed. For loans older than one year, the borrower cannot have more than one 30-day late payment during the past 12 months and all payments during the three months before the date of application must have been paid on time.
✔ Jobs and income: The government “no longer requires lenders to certify employment and income on streamline refinance transactions.” However, lenders may want such documentation to assure loan quality. This often involves verification that a borrower earns an income – not proof of how much income is earned (i.e. no paystubs, W2s or tax returns).
✔ Repairs: The FHA does not require repairs to be completed on streamline refinances with appraisals, with the exception of lead-based paint repairs. However, the lender may require completion of repairs as a condition of the loan.
✔ Escrow money: For FHA loans, the lender will require you to maintain an "escrow" or "trust" account to assure that property taxes and property insurance costs are paid. With an FHA Streamline Refinance, the lender can essentially transfer the balance in your current escrow account to the escrow account of the new loan, a big cash savings at closing. However, this usually only occurs whenever the lender on the new loan is also the servicing lender on the existing mortgage.
✔ Net tangible benefit: The government wants to assure that those refinancing get a real benefit from the process, so it requires most refinances to have at least a 5 percent payment reduction. In certain situations, a switch from adjustable to fixed-rate financing is allowed. No cash can be taken out, however, other than to repay the existing FHA loan.
✔ ‘No-cost’ refinance: HUD allows lenders to do a FHA Streamline Refinance on a “no-cost” basis, meaning the lender pays most or all closing costs in exchange for a somewhat higher rate. To see whether this works for you, compare the monthly payments you would make to refinance and the monthly cost for a no-cost refinance.
CREDIT FOR UPFRONT MIP
In general terms, if your current FHA loan was originated before May 31, 2009, the upfront MIP for the new loan is equal to only 0.01 percent of the outstanding debt. In other words, if you are refinancing an older FHA loan with a $150,000 balance, the upfront mortgage insurance premium is just $15.
When an FHA loan originated after June 1, 2009 is refinanced under the Streamline program, the new upfront MIP is generally 1.75 percent. However, borrowers with FHA loans that are less than three years old will get a credit to offset that cost. A refund from the old upfront premium is applied toward the upfront premium required for the Streamline Refinance. How much credit depends on the age of the existing loan. At six months, you might be entitled to a 70 percent credit, while a loan that is 24 months old would produce a 34 percent credit. As an example, if you paid $1,500 for your upfront MIP and refinanced into a Streamline Refinance after six months, you would get a credit equal to $1,050 ($1,500 x 70 percent).
A loanDepot licensed loan officer can help with these and any other lending questions. Call (888) 983-3240 to speak with one today.
Published March 4, 2015
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