Thanks to a special FHA program, homeowners can easily, quickly and cheaply refinance an FHA loan, even if they have little equity, zero equity, or negative equity. This program, called the FHA Streamline Refinance, is designed to help eligible applicants refinance their FHA home loans regardless of their current home value. Here's a summary of how the FHA streamline refinance program works, the program's benefits, and program eligibility requirements.
Streamline Refinance: What, How and Why
The FHA Streamline refinance was created in the 1980s to allow borrowers with FHA mortgages to improve their financial positions by refinancing. It allows this even for those whose income has dropped or whose credit has suffered. It allows this even if the mortgage balance exceeds the home's value. Why would a lender take on this risk? Because the FHA (government) is already insuring the existing mortgage and is already on the hook if the homeowner can't make the mortgage payments. Helping the homeowner refinance an fha loan makes foreclosure less likely, and that's good for everyone.
Streamlining allows homeowners to refinance quickly and less expensively. There's no agency requirement that the homeowner provide income or asset documentation, explain credit issues or pay for an appraisal. Lenders, however, can add their own conditions -- that's why it's important to shop for the best deal and best lender, even for government loans.
Qualifying for an FHA Streamline Refinance
Streamlining allows homeowners to lower their mortgage rates with a minimum of fuss and expense. Because the FHA does not require mortgage lenders to check applicants' credit, income or employment, qualifying for a refinance is not difficult. The basic eligibility requirements for an FHA streamline refinance are:
- The home loan being refinanced must be an FHA-backed mortgage.
- Mortgage payments on the loan being refinanced must be current.
- The refinance must produce a "net tangible benefit," which means it must improve the borrower's financial position-- for example, by lowering the interest rate or by converting an ARM to a fixed-rate mortgage.
- Borrowers may not take out additional cash from a streamline refinance, except for adjustments not to exceed $500 at closing
To Appraise, or Not
FHA loans can be streamlined with or without an appraisal. The only advantage of refinancing with an appraisal is that, if there is enough home value, the new loan can be larger than the old one -- allowing the borrower to wrap the refinancing costs into the new mortgage instead of paying them at closing. Homeowners who can't afford to pay their refinancing costs in cash have a second option, however -- getting the lender to cover the costs for them. That's done by choosing a no-cost streamline refinance. The borrower accepts a slightly higher interest rate, which gives the lender more income, and in exchange the lender is able to cover some or all of the borrower's costs.
The beauty of the FHA Streamline Refinance is its simplicity. No one who qualifies for a streamline loan should continue to pay a higher-than-market interest rate, because streamlined loans are easy to pull off and can be accomplished with no money out-of-pocket.