An FHA Streamline Refinance is a reduced-paperwork mortgage refinance specifically for FHA borrowers. But to qualify, you must be current on your mortgage payments and — like other types of mortgage refinancing — closing costs apply. Here’s how to qualify, along with some pros, cons and alternatives to consider.
What is an FHA Streamline Refinance?
The FHA Streamline Refinance is a low-documentation, reduced-eligibility requirement mortgage refinance program offered through the Federal Housing Administration (FHA).
What makes it different from traditional mortgage refinancing is that if you get a noncredit-qualifying FHA Streamline Refinance, you don’t need to:
- Undergo a credit check.
- Have a specific debt-to-income (DTI) ratio.
- Provide proof of income.
In other words, it can save you a lot of time and stress. But you can’t get cash out, and you can’t get rid of mortgage insurance with this type of refinance. However, it can be a good option if you prefer a simplified refinance process to lock in a lower interest rate on a new FHA loan.
Credit-qualifying vs. noncredit-qualifying Streamline Refinance
- Noncredit qualifying. This option doesn’t require a credit check or proof of income. Use this option when you’re not removing a coborrower or adding one during your FHA mortgage refinance.
- Credit qualifying. With this option, you must provide proof of income and undergo a credit check. This option is required if you’re removing a coborrower from the loan or adding a new one.
With both options, you don’t need to pay for an appraisal, which can save you several hundred dollars.
Save an average of $3,000 a year
According to the CFPB website, the average FHA borrower can save approximately $250 per month — or $3,000 per year — with an FHA Streamline Refinance. That’s $3,000 you can put towards things like home improvements or paying down higher-interest debt. Your actual savings will vary, so check with your lender to see how much you could save.
While guidelines are looser for FHA Streamline than a traditional refinance, you still must meet these requirements:
- Your current mortgage isn’t delinquent.
- You’ve made at least six payments on your current mortgage.
- You’ve had no more than one late payment in the past six months.
- It’s been at least 210 days from the closing date of your FHA mortgage.
- The refinance must result in a “tangible benefit” by way of a rate and/or term reduction.
FHA Streamline Refinance loans are available with either a 15-year or 30-year term. This means you could refinance a 30-year FHA loan to a 15-year term or vice versa as long as there’s a “net tangible benefit.” But remember that while your repayments will be lower if you lengthen the loan term, you’ll pay more in interest over the long run.
Unlike other mortgage types, lenders can refinance FHA loans without requiring a set loan-to-value (LTV) ratio. Rather, the FHA mortgage limits are based on the outstanding balance of the existing mortgage. This allows you to refinance an FHA loan that’s currently “underwater” — meaning that the mortgage is more than your home is worth.
Check with your lender to see how much mortgage you qualify for.
Interest rates for mortgages frequently change, and your actual mortgage refinance rate will depend on your creditworthiness as determined by the lender. Reach out to your lender to get the most accurate, up-to-date interest rates for your situation.
While FHA Streamline Refinance is a low-doc loan, it still requires some documents.
Be prepared to show your lender:
- Proof of homeowner’s insurance.
- Mortgage statement showing your current balance and interest rate.
- FHA case number, which can be found on your HUD settlement statement or closing disclosure. This is different from your lender account number.
- Your employer’s HR contact information to verify you’re employed.
- Bank statements for 60 days showing sufficient funds to settle closing costs.
An FHA Streamline Refinance can save you time and money — but you still have to pay applicable closing costs. If you prefer not to pay closing costs up front, you may be able to roll them into your new mortgage or take a higher interest rate in exchange for the lender paying them on your behalf.
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Pros and cons of the FHA Streamline Refinance
- Lock in a lower rate
- Lower your monthly repayment
- Change your mortgage term
- Get a refund on your original mortgage insurance premium (MIP)
- Available for homes with mortgages that are “underwater”
- No appraisal required
- Faster closing times
- Must pay closing costs which can run 2% to 5%
- Cash-out refinancing not available
- Can’t eliminate MIP regardless of equity
When is it a good idea?
FHA Streamline refinancing can be a smart idea when interest rates are low and you plan on staying in the home long enough to recoup your closing costs — this is called the breakeven point.
To calculate the break-even point: Divide your closing costs by your monthly savings.
Break-even point example:
Closing costs can run between 2% to 5%, which means on a $250,000 refinance, you could pay between $5,000 and $12,500. So, if you’re saving $250 a month by doing the refinance, your breakeven point is 20 to 50 months, depending on the amount of your loan’s closing costs.
But doing an FHA streamline Refinance — or any type of refinancing — is probably not a good idea if you’re moving soon or are having financial difficulties. If you’re having difficulty making your payments, consider the FHA-Home Affordable Modification Program.
3 alternatives to the FHA Streamline Refinance
An FHA Streamline Refinance isn’t the only option to secure a lower rate or change the terms of your FHA loan.
Here are three alternatives:
- Conventional mortgage refinance. You can refinance your FHA mortgage into a conventional mortgage with this option. It can be beneficial when your equity reaches 20%, as you can drop your MIP payment. You can’t do this by refinancing into another FHA loan. Should you refinance your FHA loan into a conventional loan?
- Cash-out FHA refinance. This option allows you to replace your current FHA mortgage for another FHA mortgage for a higher amount. The difference between your old mortgage and the new one is the “cash-out” portion, which can be used for any purpose. You can’t get cash-out refinancing with an FHA Streamline Refinance.
- FHA-HAMP. This stands for FHA-Home Affordable Modification Program and is for FHA homeowners in financial distress. It allows FHA borrowers to modify their FHA loans to reduce monthly mortgage payments and avoid foreclosure.
The FHA Streamline Refinance’s main benefits are reduced paperwork and lower eligibility requirements. But if you have good credit or want to get cash out, it may make sense to convert to a conventional loan or do an FHA or conventional mortgage cash-out refinance.
Learn more about cash-out refinancing and when it makes financial sense to switch from an FHA to conventional loan.