FHA loan rates today may be lower than what many borrowers with FHA mortgages are currently paying. Those homeowners may be able to refinance quickly and at a reduced cost through the FHA Streamline loan program. This applies even if the borrower's property value or credit score has gone down.
Advantages of FHA Streamline Refinance
Unlike conventional loans, FHA home loans are insured by the federal government. This means a new lender doesn't object to refinancing an existing loan -- even without an appraisal or good credit. FHA protects the new lender because the agency is already backing the home loan. It's already on the hook if the borrower defaults, and changing mortgage lenders doesn't alter that fact. Actually, it's better for the agency if homeowners can improve their finances by refinancing because that reduces the chance of a mortgage default.
In order to be eligible for a streamline refinance, the borrower must be able to achieve a net tangible benefit.
What Is a Net Tangible Benefit?
FHA only allows streamline refinances that leave homeowners in a stronger financial position. This means a lower monthly payment or a more stable loan. The specific meaning of net tangible benefit depends on the type of refinance selected. Here are the requirements for refinances to and from fixed, adjustable and hybrid home loans.
Reducing a mortgage term or dropping / adding co-borrowers is allowed but NOT considered a net tangible benefit in itself. It would be difficult to meet the payment reduction requirement if trying to streamline from a 30-year loan to a 15-year loan.
Other FHA Streamline Refinance Requirements
FHA does not require lenders to check applicants' credit, income or employment. Homeowners can apply for a Streamline Refinance with or without an appraisal, and with or without credit qualifying. Applicants must have an "acceptable payment history," however. This is defined as no 30, 60 or 90-day late payments within the most recent three months, and no more than one 30-day late payment in the most recent twelve months.
Applicants must have made at least six mortgage payments on their current FHA-insured loan, and at least 210 days must have passed since the most recent closing date.
Appraisal or No Appraisal?
Homeowners are not required to get an appraisal to refinance, which is a real boon to those whose properties have lost value. So why would anyone choose to get an appraisal? With an appraisal, if the value is high enough, the homeowner does not need to pay the refinance costs (mortgage insurance, lender fees and other charges) out-of-pocket. These costs can instead be added to the balance of the refinance loan. If the appraised value isn't high enough to support an increase in the loan balance, FHA has instructed lenders to ignore it and proceed with a no-appraisal streamline. Those who can't afford to pay their costs out-of-pocket have another option -- if they refinance at a slightly higher interest rate, the lender earns more money on the loan and can use that to pay the closing costs for the borrower.
Homeowners who don't wish to add their closing costs to the new mortgage amount need not get an appraisal in most cases.
Borrowers with condominiums that are no longer FHA-approved must refinance an appraisal. Investors with qualifying property may only refinance without an appraisal.
Mortgage Insurance Premiums Merit Consideration
In most cases, today's FHA home loans require higher mortgage insurance premiums than they used to, and unlike previous versions of FHA mortgages, this coverage is required for the life of the loan. That's a consideration for homeowners who are close to being able to drop their coverage -- they may be better off refinancing to a conventional (non-government) product.
The amount of mortgage premiums for the new loan depend on a complicated set of rules, and this new coverage is factored into the net tangible benefit calculation. If a borrower's interest rate drops but the mortgage insurance increases, he or she might not be eligible for a streamline mortgage.
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