For most homeowners, the monthly mortgage payment is the biggest line item in their budget. When that budget gets tight, homeowners often turn to a mortgage refinance to lower their interest rate and monthly payment, to borrow some of their home equity, or to change their loan term.
The refinancing process usually is similar to getting a mortgage in the first place. Borrowers need to document their income, go through a credit check, get a new appraisal, and pay closing costs. But qualified homeowners with a Federal Housing Administration mortgage can take advantage of an FHA streamline refinance to make the process simpler and easier.
Here’s what you need to know about refinancing with the FHA through this program:
- What Is an FHA Streamline Refinance?
- Benefits of an FHA Streamline Refinance
- Drawbacks of an FHA Streamline Refinance
- FHA Streamline Refinance Costs
- Is an FHA Streamline Refinance Right for You?
- The Bottom Line on FHA Streamline Refinancing
What Is an FHA Streamline Refinance?
The FHA helps Americans buy homes by insuring mortgages issued by private lenders. If the borrower defaults, the FHA covers the lender’s losses. This reduces the lender’s risk and serves as encouragement for lenders to offer more loans.
For homeowners with an FHA mortgage, a streamline refinance requires less paperwork documenting income and finances than a refinance to a conventional loan. FHA loans also don’t require a new home appraisal, which typically costs between $300 and $600.
The streamline refinance process gives FHA mortgage holders a simple way to reduce the interest rate on their mortgage, extend or shorten their loan term, and save money on their monthly payment. The tradeoff comes in the form of limits on a streamline refinance when compared with a conventional loan.
FHA streamline refinance vs. conventional refinance
The primary difference between an FHA streamline refinance and a conventional refinance is the amount of paperwork required. The FHA streamline program, as its name suggests, streamlines the process by eliminating the need for a new appraisal, and by allowing borrowers to forgo the need to document their income, employment, and other financial details.
A streamline refinance also limits homeowners to borrowing no more than $500 in equity, which is the difference between the current value of the home and how much is still owed on the mortgage.
With a conventional refinance, you could borrow all but 10% of the equity in your home — and sometimes even more, depending on the lender. That could easily total tens of thousands of dollars, which would be repaid at relatively low interest rates as part of the new mortgage. While the money from a cash-out refinance can be used for anything, most homeowners use their equity to improve their long-term finances by paying for home improvements or education costs, or by consolidating debts.
To qualify for a streamline refinance, borrowers must already have an FHA mortgage. While anyone can apply for a traditional refinancing loan, they will have to go through the more rigorous application process for a conventional loan.
Types of FHA streamline programs
There are two primary types of FHA streamline loans: credit qualifying and noncredit qualifying.
A credit-qualifying FHA streamline refinance involves the lender verifying the borrower’s credit and financial information to be sure that they are capable of repaying the loan. The lender confirms the borrower’s income and credit score, calculates their debt-to-income ratio, and makes sure the borrower can afford their mortgage payment. It’s a similar process to applying for a mortgage when buying a home.
Credit-qualifying refinances are used with FHA streamline refinances when refinancing will increase the monthly payment on the loan by more than 20%, or when it will cause other major changes to the loan’s terms.
Borrowers with good credit also are more likely to get lower interest rates or other favorable terms with a credit-qualifying loan.
With a noncredit-qualifying FHA streamline refinance, borrowers don’t need to provide income and credit information, and lenders don’t need to verify whether the borrower can afford to keep paying their mortgage.
One of the main drawbacks of noncredit-qualifying refinances is that borrowers might not be eligible to reduce their interest rate as much as they could with a credit-qualifying refinance.
FHA streamline requirements
To qualify for an FHA streamline refinance, borrowers must meet these requirements:
- The loan to be refinanced must be insured by the FHA.
- The borrower must not be delinquent on the loan.
- The refinance must create a tangible benefit for the borrower. Tangible benefits can vary based on the type of loan, but this generally means the new loan has a lower interest rate, the borrower moves from an adjustable-rate to a fixed-rate mortgage, or the borrower reduces the loan term.
Lenders have the flexibility to offer streamline refinances in many ways, so long as borrowers meet these requirements. For example, some lenders may offer refinancing with no closing costs, but charge a higher interest rate instead.
Benefits of an FHA Streamline Refinance
There are multiple benefits to getting an FHA streamline refinance:
- Reduced documentation requirements. FHA streamline refinancing requires less documentation than conventional refinancing, and doesn’t require a new appraisal.
- The ability to adjust your loan terms. Streamline refinancing can reduce your interest rate or your monthly payment, allow you to change between an ARM and a fixed-rate mortgage, and extend or shorten your loan term.
- A mortgage insurance premium refund. FHA mortgages require borrowers to pay MIP. You make both an upfront MIP payment based on the loan amount, and an annual MIP payment divided into monthly installments. When you streamline refinance an FHA loan, you can get some of the upfront MIP paid on your original loan refunded. If you refinance within five years of getting your loan, you could recoup as much as 97.5% of the original loan’s upfront MIP payment.
Drawbacks of an FHA Streamline Refinance
Streamline refinancing isn’t perfect, so it’s important to know the drawbacks:
- Only FHA borrowers are eligible. If your current mortgage is not an FHA loan, you can’t get a streamline refinance.
- You have to pay MIP. While you may receive a refund for some of the upfront MIP you paid to get your original loan, your new FHA streamline loan also will require an upfront MIP payment, as well as the annual MIP payment. The upfront MIP is equal to 1.75% of the amount borrowed, so you’ll have to pay $1,750 for every $100,000 you’re refinancing. The MIP refund you receive from repaying your previous FHA loan could help cover this cost.
- There’s a limit on how much cash you can take out. FHA streamline refinances only allow borrowers to cash out $500 in equity from their home. If you’re looking to borrow cash for a major expense, you’ll need another refinance option.
FHA Streamline Refinance Costs
Refinancing a loan typically costs money, and a streamline FHA refinance is no different. When refinancing your FHA loan, you should be ready to pay the related costs.
Lenders are free to charge typical closing costs for an FHA streamline refinance, including loan origination fees, prepaid property taxes, title fees, and recording fees. This is on top of your upfront MIP.
One benefit of a streamline refinance is that the process is simplified. This could help you save money, for example, by not needing a new home appraisal.
Is an FHA Streamline Refinance Right for You?
Whether an FHA streamline refinance is right for you will depend on your specific situation and goals.
FHA streamline refinancing is simpler than getting a conventional refinancing loan. You could qualify even if you have poor credit, making it a good choice for borrowers who might not be able to get a loan otherwise.
Streamline refinancing also could help you save money by lowering your loan’s interest rate, which may reduce your monthly payment. Extending your loan’s term could lower your monthly payment as well, and give you more breathing room in your budget.
However, FHA streamline refinances require borrowers to pay for MIP, and limit the amount of home equity you can borrow to $500.
Homeowners considering a streamline refinance should look for a loan offer with no out-of-pocket costs, says Jeffrey Loyd, principal at Mortgage Acuity, a mortgage company based in Hackensack, New Jersey.
“If you don’t have to pay any costs out of pocket, the lower rate and payment is a win,” he says. “If you have to pay out of pocket for the streamline refinance, you may have better options to reduce your overall debt and payments.”
The Bottom Line on FHA Streamline Refinancing
FHA streamline refinancing could be a helpful option for homeowners who want an easy way to refinance their loan. It does lack some of the features of a conventional refinance, which may be a better choice for people who have built significant equity and have good credit scores. But the reduced paperwork requirements and optional credit check of a streamline refinance could save time and money for homeowners with an FHA mortgage.