Simplified Refinancing: FHA Streamline Facts

If you are a current FHA-insured homeowner who is still making mortgage payments, it is likely that you have been looking into your refinancing options. By having simple eligibility requirements and reduced paperwork, FHA Streamline refinancing is a very attractive option for many borrowers. The following information may be helpful to you in determining whether this loan makes sense for your unique situation.

FHA Streamlining benefits:

• No qualification checks— your present FHA mortgage proves you are a good credit risk

• No need to calculate a debt-to-income ratio

• There is no credit check or income verification requirement

• Your original appraisal can be used to calculate your loan amount, which is helpful to homeowners who are underwater on their loans

• No need to meet with a loan officer—if your lender permits, you may be able to complete some paperwork over the Internet or apply by telephone

Mortgage Insurance:

Getting a lower mortgage rate without creating a considerable raise in your mortgage insurance premiums is one of the chief advantages of the FHA Streamline refinance. Annual (paid monthly) and upfront mortgage insurance premiums on new FHA loans today are set at 1.25 percent and 1.75 percent of the loan amount, respectively. An FHA Streamline refinance will reduce those premiums to .55 percent and .01 percent (upfront premiums are $10 for each $100,000 of the loan amount). However, reduced premiums are only available to borrowers with an existing FHA loan that was endorsed before June 1, 2009. FHA loans endorsed after that date will incur the new higher premiums when refinanced.

The FHA also determines whether refinancing will create an actual benefit -- a reduced risk of rate increases or a lower payment -- compared with your existing loan through a net tangible benefit test. One section of the test measures whether your mortgage insurance, interest and principal drops by at least 5 percent. Higher premiums reduce the benefit of refinancing for homeowners whose loans were endorsed after the cut-off date – enough to make the new loan fail the net tangible benefit test.

Lender overlays:

One benefit of the FHA Streamline refinance is not requiring a minimum credit score or appraisal, meaning that you can refinance even if you’re upside-down on your current mortgage. However, most lenders have imposed their own qualification standards, called “overlays.” Some require a FICO* score of at least 640 and others will not accept any score lower than 680, but some may accept a score as low as 500 with a higher interest rate. Some lenders will also demand an appraisal. So if you have impaired credit or your loan is underwater, shop for a lender that offers flexible requirements.

Requirements:

• Cash out is limited to $500 (for adjustments at closing)

• Closing costs cannot be added to your loan amount

• Avoiding closing costs by accepting a higher interest rate, may cause your loan to fail the net tangible benefit test

• Overlays may require documentation of financial stability and responsibility

• Must have an existing FHA mortgage

• No late mortgage payments for the last 12 months

• Must have owned the property for at least six months

• Must have an FHA-approved lender

• Closing costs must be paid up front or handled through a “with appraisal” or “no-cost” FHA Streamline loan

Today’s economy dictates that to make housing more affordable, everyone needs a way to lower monthly payments. With permanently lowered monthly payments, the money you will save with an FHA Streamline loan can go a long way toward helping you achieve your financial goals.

*Note: A FICO score makes up a substantial portion of the credit report that lenders use to assess your creditworthiness. FICO is an acronym for the creators of the score, the Fair Isaac Corporation.