If you already have a mortgage that’s backed by the Federal Housing Administration (FHA), you may have access to one of the simplest refinancing options available – the FHA streamline refinance program. An FHA streamline refinance allows you to swap your current FHA loan with a new one to lower interest rates or reduce monthly payments. Unlike other refinance options, the process is typically quick and seamless.
Here, we’ll review how an FHA streamline refinance works, what the qualifications entail and the pros and cons.
- If you have an FHA mortgage – a loan insured by the FHA – and you’ve made payments for at least 6 months, you may qualify for an FHA streamline refinance.
- FHA streamline refinances usually require less documentation than other kinds of refinances, and the process can be swift.
- A streamline refinance can help borrowers lower interest rates and save money over the long term.
- To take advantage of an FHA streamline refinance, you’ll need to receive a notable benefit, like lowering an interest rate or switching from an adjustable-rate mortgage to a fixed-rate loan.
- There are two types of refinance: credit-qualifying and noncredit-qualifying – ultimately your lender will decide the right one for you based on your credit profile, whether borrowers are being added or removed and the amount you’re reducing your mortgage payment.
What Is A Mortgage Refinance?
A mortgage refinance allows you to replace your existing home loan with a new one. Generally, refinancing helps you achieve one of the following goals:
- Lock in a lower interest rate
- Lower monthly payments
- Switch from an adjustable-rate mortgage to a fixed-rate loan
- Change your loan’s repayment period (such as going from a 15-year loan to 30 years or vice versa)
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What Is An FHA Streamline Refinance?
An FHA streamline refinance is an option available to borrowers with existing FHA loans. Like a conventional mortgage refinance, a streamline refinance replaces your existing mortgage, and it can be a way to lower your interest rate or reduce monthly payments. Since you’ve already qualified for an FHA loan, in most cases, you won’t have to endure the same borrowing scrutiny during the refinance process. In fact, it’s called a streamline refinance because the process usually involves less time and paperwork than a conventional loan refinance.
Benefits of an FHA refinance:
- Saves time and paperwork
- The process requires less borrower scrutiny because you’ve already qualified for an FHA loan.
- Often, it’s a less expensive refinance option.
- Fewer requirements than a standard refinance – typically, you don’t need a new home appraisal
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Who Qualifies An FHA Streamline Refinance?
An FHA streamline refinance is only available to borrowers with existing FHA loans. It must offer what the U.S. Department of Housing and Urban Development calls a “net tangible benefit to the borrower.” In a nutshell, that means that you, as the borrower, have to gain something from the new loan.
HUD’s net tangible benefits requirements include:
- Lower interest rates on a fixed-rate mortgage that yield at least a 0.5% reduction in your payment, including the mortgage insurance premium
- Shortening the loan term or extending it to lower payments
- Reduced monthly payments
- Changing from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage
To qualify for an FHA streamline refinance, you need to be current on your mortgage, but the program does allow you to refinance even if you owe more than your home is worth. Any cash you want to take out of your home is limited to $500 or less.
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Credit-Qualifying Vs. Noncredit-Qualifying FHA Refinances
There are two types of FHA streamline refinance options – credit-qualifying and noncredit-qualifying. Both can help you lower your interest rate and reduce monthly payments on a FHA mortgage, but the FHA requires a credit-qualifying streamline refinance when the refinance will increase your monthly payments more than 20%.
The biggest difference between a credit-qualifying and noncredit-qualifying streamline refinance is the degree to which the lender will evaluate your ability to repay the loan. The credit-qualifying streamline refinances are for riskier loans, in which case the lender will verify your income, credit and debt-to-income ratio (DTI). A noncredit-qualifying FHA streamline refinance is more straightforward – the lender may or may not do a credit check, but income verifications and DTI calculations aren’t required.
With a credit-qualifying streamline refinance, lenders:
- Verify your income
- Check your credit
- Calculate your DTI
With a noncredit-qualifying streamline refinance, lenders:
- May or may not review credit scores
- Typically do not verify income
- Do not review DTI
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Costs Of An FHA Streamline Refinance
Don’t confuse a simpler refinance process for a no-cost refinance. FHA streamline refinances come with closing costs just like other types of refinances. Some lenders may technically offer a no-cost refinance by charging a higher interest rate on your new mortgage instead of actual fees at closing.
Other lenders, meanwhile, may charge closing costs that include title fees, application fees and recording fees. The FHA does not allow lenders to roll closing costs into the new mortgage amount with a streamline refinance (whereas with other refinance types, you may be allowed to do so and avoid the up-front fees).
Along with closing costs, you’ll have to pay a new mortgage insurance premium (MIP) on an FHA streamline refinance (even if you have already paid off your MIP on your original loan). As with an FHA loan, you’ll pay an upfront MIP (1.75% of the loan amount) and an annual MIP, which will run between 0.15% and 0.75% of the loan, depending on the loan’s term and your loan-to-value ratio (LTV).
Potential Savings From An FHA Streamline Refinance
An FHA streamline refinance could save you money by lowering your monthly payments and/or reducing the amount of interest you pay on your loan over time. But as is the case with any type of refinance, extending your loan term could increase the total amount of interest you pay over the life of your mortgage, even if your monthly payments decrease.
Let’s say you refinance your FHA loan with a streamline refinance after paying it for 7 years. Your monthly payments might decrease. But if you sign a 30-year loan, you’ll reset the clock on your payment schedule. That could result in you paying more interest on the whole.
For example, if your original loan amount was $250,000 with an interest rate of 4% on a 30-year loan, your monthly payment would be $1,194 (not including MIP). After 7 years, you have a remaining balance of $213,714 – you’ve paid off some principal and interest and you still have 23 years left on the loan. If you keep paying this loan, you’ll have $112,122 in interest left to pay over the course of the 23 years. Now let’s say you’re going to opt for an FHA streamline refinance on this loan and you get a new rate of 3.25% and a new term at 30 years. Your new monthly payment goes down to $930, which saves you $264 a month. But here’s the catch: Now, your total interest over the course of the new loan is $121,121. Plus, your MIP will reset on the new loan.
FHA Streamline Mortgage Refinance: Pros and Cons
Refinancing a mortgage is a big decision, and there are benefits and drawbacks to doing an FHA streamline refinance.
The pros of an FHA streamline refinance include:
- A (usually) faster approval process than conventional refinancing
- Less paperwork and documentation to apply
- May not require a home appraisal
- Flexible credit and income requirements for a noncredit-qualifying refinance
The cons of an FHA streamline refinance include:
- Limited to borrowers with a current FHA loan
- Mortgage insurance premiums (upfront and ongoing) add to the cost
- Can’t roll closing costs into the loan
- Can’t do a true cash-out refinance
FHA Streamline Application Process
If you’re interested in doing an FHA streamline refinance, it can be helpful to know what to expect. Here’s how to prepare.
1. Check Your Eligibility
Before you apply for an FHA streamline refinance, make sure your loan is eligible. If your FHA loan is less than 1 year old, you’ll need to be current on payments. If you’ve had your mortgage for more than a year, you can have one late payment (up to 30 days) in the past 12 months, but payments must be current for the six months before applying to refinance.
2. Review Your Current Loan Terms
See if an FHA streamline refinance makes sense by reviewing the terms of your existing FHA mortgage. Pay attention to your current interest rate, your balance and how much time you have left on your loan.
3. Compare Lenders
FHA streamline refinance rates and closing costs can vary by lender. As is the case with any refinance (or mortgage application, for that matter), it’s important to shop around with different lenders to see who has the most competitive offer.
4. Gather Basic Documentation
The nice thing about an FHA streamline refinance is that you may not need to gather the same amount of documentation as with a conventional refinance. But you should still be prepared to provide proof of ID, proof of occupancy and mortgage statements showing your loan is current and eligible.
5. Submit Your Application
Once you’ve chosen a lender, confirmed your eligibility and gathered your basic documentation, you can apply for an FHA streamline refinance. Some lenders let you do it online.
6. Close On Your Mortgage
Once your loan is ready to close, you’ll need to review and sign your loan documents and pay closing costs.
Other Mortgage Refinance Options
If you’re looking to refinance your FHA loan, you don’t have to apply for an FHA streamline refinance. Here are some other options to consider.
An FHA Rate-And-Term Refinance
As with an FHA streamline refinance, the goal of an FHA rate-and-term refinance is to reduce your mortgage rate, lower your monthly payment by extending your loan term or both. It’s a great option if mortgage rates have decreased since you bought your home or if your credit has improved. Unlike the FHA streamline program, you can move from a conventional loan to an FHA loan with this program. However, expect to go through a full loan application process, including a review of credit score and income, and a new home appraisal process.
A Conventional Loan Refinance
If you refinance your FHA mortgage into a conventional loan, you don’t have to pay upfront MIP. For conventional loans, borrowers don’t pay MIP but instead pay private mortgage insurance (PMI) – but if you have at least 20% equity in your home, you won’t have to pay PMI.
However, a conventional mortgage refinance may have stricter requirements, and the process may require more documentation and take longer.
A Cash-Out Refinance
With a cash-out refinance, offered on conventional loans and FHA loans, you get a new loan with a larger balance than what you owe on your current mortgage. You can use the extra cash for almost any purpose. With an FHA streamline refinance, you can’t take cash out of your home.
FAQ
The Bottom Line: An FHA Streamline Refinance Might Be Right For You
An FHA streamline refinance can be a fast, relatively painless way to replace your current FHA loan with a new one that has more favorable terms. But before you decide that an FHA streamline refinance is your best choice, you may want to explore other refinance options, especially if you’re interested in tapping your home equity for cash or shedding ongoing mortgage insurance premiums. The more research you do, the more likely you are to make the right choice.
Learn more about the FHA streamline refinance program.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
