Refinancing your mortgage can be a valuable financial move. It can make it easier to afford your monthly payments and/or lower the long-term cost of your mortgage. Too often, though, people face obstacles to refinancing. These might include a drop in the home’s value that wiped out any equity the owners had. It could also mean financial difficulties that would prevent them from qualifying for most mortgages.
Streamline refinancing can help overcome these obstacles. If you have an FHA mortgage, consider whether a streamline refinance loan is the right solution for you.
[READ: Today’s FHA Mortgage Rates]
What’s a Streamline Refinance Loan?
A streamline refinance mortgage is a home loan that requires less qualifying documentation than a standard mortgage. The idea behind streamline refinancing is that the lender or insurer already owns or backs the borrower’s existing mortgage. So it doesn’t matter if the borrower’s situation has worsened because the loan is already on the books. A refinance that makes the mortgage more affordable reduces the likelihood of default.
Perhaps the most prominent feature of a streamline refinance loan is that it doesn’t require a new FHA appraisal. And you don’t have to provide income documentation or have your credit analyzed, although opting to do so may get you a better interest rate.
FHA Streamline Refinance Loan: With or Without Credit Qualifying
With most loans, a lender will check your credit, income and assets to determine whether you qualify. When it comes to refinancing, though, some homeowners face a catch-22 situation. They need to refinance to solve their financial problems, but those problems can prevent them from qualifying for a refinance loan.
That’s where a streamline refinance loan can help. The FHA offers streamline refinance loans with or without credit qualifying. The main difference is that to refinance without credit qualifying, all original borrowers must be on the new loan.
If you’re eligible, the lender is allowed to use the information and documents from the original loan file. This is known as a non-credit-qualifying refinance.
While all original borrowers generally have to be on the new non-credit-qualifying loan, there are some exceptions:
— The mortgage has been assumed from the original borrower and the original borrower has been released from liability for the loan.
— A divorce decree or legal separation awarded the property and responsibility for payment to the remaining borrower, and that borrower has made the mortgage payments for a minimum of six months.
— An original borrower has died, and the remaining borrower has inherited the property and responsibility for payment.
There is one more requirement. The terms of the new mortgage must provide a net tangible benefit to the borrower.
[Read: Best Mortgage Refinance Lenders.]
What Is a Net Tangible Benefit?
“Net tangible benefit” means that the new loan must offer a financial advantage over the loan it is replacing. This advantage can take a few different forms:
— A 0.5-percentage-point reduction in the combined interest rate (which includes mortgage insurance) if refinancing a fixed mortgage to another fixed mortgage
— A 2-percentage-point reduction in the combined interest rate if refinancing a fixed loan to an adjustable-rate mortgage
— A rate reduction of 1 or 2 percentage points (depending on its original terms) if refinancing one adjustable-rate mortgage to another
— A 5% reduction in the monthly payment
— A switch from an adjustable-rate to a fixed-rate mortgage (as long as the new rate isn’t more than 2 percentage points higher)
— A reduction of at least three years in the loan term if the new loan is fixed and the payment (principal, interest and mortgage insurance) doesn’t increase by more than $50. Interest rate limitations also apply.
While these requirements limit when you can get a streamline refinance, they also work for your protection by making sure there is a financial benefit to your new loan.
Is Streamline Refinancing Only Available on FHA Loans?
The FHA isn’t the only loan with a streamline option. The VA has a streamline refinance called an interest rate reduction refinance loan, or IRRRL.
Like the FHA streamline refinance, the IRRRL is available without an appraisal, and the loan is usually non credit qualifying. An IRRRL must replace an existing VA loan. Also, you must either live in the home financed by the loan or certify that you previously lived in that home.
Who Is Eligible for FHA Streamline Refinancing?
Here is a summary of eligibility requirements for an FHA streamline refinance loan:
— You must have made at least six payments on the existing loan.
— There’s a waiting period: at least six months after the original payment due date and 210 days after the closing date on the existing mortgage.
— Payments on the existing mortgage must be up to date with no late payments during the previous six months and no more than one 30-day late payment within the past 12 months.
Pros and Cons of Streamline Refinance Loans
Pros
— Refinancing without an appraisal saves time and may allow you to act on a drop in interest rates more quickly.
— You won’t need to pay an appraisal fee.
— You can refinance with little or no equity in your home.
— You can probably refinance even if you’ve had credit problems or a loss of income.
Cons
— The amount you can borrow above your existing mortgage payoff is limited to $500.
— You aren’t allowed to roll your closing costs into the new loan.
— Your ability to change the terms from the current loan is limited. For example, shortening the loan term may not qualify as a net tangible benefit if it increases your payment by more than $50.
— You’ll have to pay a fresh up-front mortgage insurance premium. Though, you may be eligible for a partial refund of your old loan’s up-front premium.
When Is Streamline Refinancing a Good Idea?
A case can be made for a streamline refinance in both falling and rising interest rate environments.
When rates are falling, homeowners may be deluged with refinancing promotions from lenders. But FHA streamline refinance guidelines require a significant rate reduction in most cases. “Reduction in interest rates creates the perfect environment because a homeowner must save a specific amount to meet the threshold for enough benefit to the homeowner, or the loan cannot close. This is for the consumer’s protection, and when enough is saved, the loan is great,” says Phil Crescenzo, vice president of the Southeast Division at Nation One Mortgage Corp.
On the other hand, when rates are rising, a streamline refinance can give homeowners with an adjustable-rate mortgage a chance to limit their risk. “In an increasing interest rate environment, it’s a smart way to convert an adjustable-rate mortgage to a fixed-rate mortgage before rates climb further,” says Sean Wilkoff, an assistant professor of finance at the University of Nevada, Reno.
[Current 30-Year Mortgage Refinance Rates]
Next Steps
If you’re considering an FHA streamline refinance mortgage, here are some steps you should take:
— Check whether you are eligible for a streamline refinance loan — chiefly, whether your existing loan is an FHA mortgage.
— Evaluate your financial circumstances. If they are strong enough (good credit, sufficient income and substantial equity in your home), you may qualify for a conventional mortgage. In that case, conventional financing will probably be cheaper than an FHA loan.
— Consider whether your goals for refinancing match up with the FHA’s standards for a net tangible benefit.
Finally, remember that not all FHA streamline refinance loans are the same, and you don’t have to refinance with your current lender. Wilkoff says, “To get the best terms on an FHA streamline refinance, shop around. Borrowers who compare multiple lenders often secure better rates.”
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What Is an FHA Streamline Refinance? originally appeared on usnews.com
