June 28, 2021
An FHA streamline refinance is similar to other government refinances, including the VA's IRRRL. Compared to the traditional refinance that is more involved, you can save time because there are fewer documentation requirements. Let's dive into what's involved and why an FHA streamline might be the right choice for you.
FHA Streamline Refinance Guidelines
The first requirement for an FHA streamline refi is that you have to have an FHA loan already. A streamline can't be done if you have a different mortgage type like a conventional or VA.
Two Types of FHA Streamline Refinances
Many borrowers are concerned about their credit and wonder if they'll need to have their credit pulled. It's good for them to know that there are two different types of streamline refinances:
1. Credit Qualifying FHA Streamline Refinance — Requires Credit Check
This type requires a credit check and analysis, but an appraisal isn't needed.
2. Non-Credit Qualifying FHA Streamline Refinance — No Credit Check
Neither a credit check nor an appraisal is needed.
The lender will be able to tell you which you'll qualify for and whether you need to have your credit pulled.
Net Tangible Benefit
Similar to a VA IRRRL, there has to be a financial benefit to the borrower to refinance.
Although the net tangible benefit test varies based on specific scenarios, it prevents borrowers from refinancing unnecessarily. It also protects them financially.
Streamline Isn't Cash-Out
The most cash you can get from a streamline refi is $500. So, if you need more than that, consider a regular cash-out refinance.
FHA Streamline Refinance Pros and Cons
Let's see what the pros and cons of an FHA streamline refi are.
- The most significant advantage is that it's very likely you can lower your rate or change the term of your loan with very little work on your end.
- These refinances are pretty simple. They're called a streamline because there's limited underwriting and the borrower credit documentation is less than a regular refi.
- The most significant disadvantage of refinancing an FHA loan into another FHA loan is that you'll still have mortgage insurance premium (MIP). That can add $100 or more to your payment each month.
Many homeowners with an FHA mortgage want to get rid of MIP as soon as possible. For borrowers with less than stellar credit — an FHA loan may be the only option. But, as soon as their credit has improved to 620 and above, they should consider refinancing into a conventional home loan.
Just compare your options. Sometimes even with mortgage insurance, an FHA loan is still a better deal because of its low rates. Also, consider the cost of refinancing compared to how much you're saving each month. How long will it take you to recoup your costs? Is it worth it?
FHA Streamline Refinance Closing Costs
Typical closing costs for an FHA streamline will vary from lender to lender, but some fees are constant. Let's see what they are:
- Upfront mortgage insurance premium (UFMIP): If the current FHA loan is less than 3-years old, there's a refund credit to reduce the UFMIP.
- Title fees: These vary based on location and can include title insurance and settlement fees. When you talk to a lender and apply for a refinance, you'll get a loan estimate. This estimate will list all of your costs.
- Escrow accounts: If you have your taxes and insurance included in your payment, and you switch lenders, you may need to come up with some property tax or homeowner insurance funds for the new lender's escrow account. Ask your lender about this.
And when it comes to closing costs, you can choose to:
- Pay for them out of your pocket
- Roll them into the loan and increase the loan balance
- Accept a higher interest and have the lender cover the costs
Let's talk about a zero-cost refi.
Zero-Cost FHA Streamline Refinance
For any type of refinancing, FHA, VA, conventional, you'll see advertisements for a "zero-cost" refi. But zero-cost means there's no money coming out of your pocket. Here's how it works.
The lender charges you a higher interest rate and pays for the closing costs. If you want the lowest interest, you'll need to:
- Roll the costs into your loan, which will increase your balance
- Or you can pay for the closing costs out of your pocket
And when it comes to lender fees, they vary. Some charge an origination fee, and others don't. It's good to compare all your options.
Overall, FHA loans have many advantages. If you're interested in lowering your interest or changing the term of your loan and your credit score is less than 620, an FHA streamline might be your best option.