The Federal Housing Administration (FHA) streamline refinance
may be the easiest way for some homeowners to get today's
best mortgage rates
and quickly reduce their monthly payments.
Designed for existing FHA customers, the "streamline refinance"
allows homeowners to refinance with less
documentation
and underwriting. The calling card of the FHA streamline refinance
is that no appraisal is required, a huge draw for underwater
homeowners, says Jay Dacey, a senior loan officer with Metropolitan
Financial Mortgage Company in Edina, Minn.
In addition, the lack of typical refinance requirements, such as
income and credit verifications, allows the process to move more
quickly than traditional refinances, says Joe Parsons, a managing
partner of PFS Funding in Dublin, Calif.
But while the FHA has designed the streamline refinance to be
quick and simple, there are still a set of specific requirements
that must be met, and some lenders even institute their own rules,
so it pays to shop around.
"A lot of lenders will do streamline refinances, but everyone
has their own slightly different rules," says Jason Auerbach,
divisional manager with First Choice Loan Services in Morganville,
N.J.
Several advantages
Probably the most important advantage to an
FHA streamline refinance
is that there is no required appraisal, says Dacey.
"Most lenders will use the value of the last FHA appraisal that
was completed," he says. Or, lenders will use your home's original
price.
An FHA streamline refinance also doesn't require as much
documentation as other refinances. Borrowers aren't required to
provide income, employment or credit verification. This makes the
entire process faster and less cumbersome, Dacey explains.
FHA mortgage rates have also been substantially lower than
conventional mortgage rates in recent years, adding to the list of
the program's benefits, says Keith Gumbinger, vice president of
HSH.com. For the week ending Feb. 8, 2013, a conventional 30-year
fixed-rate mortgage averaged 3.68 percent, while an FHA-backed
30-year fixed was 3.41 percent, he says.
Rules do apply
While the streamline refinance doesn't have the typical strict
set of refinance requirements, it does have several specific
standards that borrowers much meet.
-
The refinance must reduce payments:
In order to be approved, the refinance terms must reduce your
monthly payment by at least 5 percent.
-
You must be current:
Refinance applicants must be current on their mortgage. Borrowers
are only allowed one late payment in the previous year.
Furthermore, you must have made your last three mortgage payments
in full and on time.
-
There's a refinance waiting period:
You must make payments for at least six months on your existing
FHA mortgage before you can apply for a streamline
refinance.
-
Your loan balance cannot increase:
The FHA doesn't allow you to take any cash out with a streamline
refinance. All of the closing costs and fees associated with your
loan must be paid out of pocket -- they cannot be financed into
the loan amount. "In most cases, the borrower will have to bring
some cash to the table to close," says Parsons. If you don't have
cash available to pay for the closing costs, your lender can
offer you a higher-than-market interest rate in exchange for
paying the closing costs.
Mortgage insurance premiums
An FHA streamline refinance, like all other FHA mortgages,
requires upfront and annual mortgage insurance premiums.
If your current mortgage was endorsed by the FHA before June 1,
2009, the upfront premium is 0.01 percent of the loan amount, says
Parsons. "It is a cost, but not usually an out-of-pocket cost,
since it is almost always added to the loan balance," he says.
In addition to the upfront premium, these loans also require an
annual premium -- paid monthly -- of 0.55 percent of the base loan
amount.
FHA mortgages endorsed after June 1, 2009 have a much higher
upfront premium of 1.75 percent. The annual premium varies by loan
term and loan-to-value (LTV) ratio. It ranges from 1.25 percent
(30-year term, LTV over 95 percent) to as low as 0.35 percent
(15-year term, LTV under 90 percent).
Currently, the annual premium must be in place for at least five
years, and after that time, it can be cancelled whenever the loan
balance has been paid down to 78 percent, Parsons says.
Changes are coming
For FHA loans registered after April 1, 2013, the annual premium
will increase by 0.10 percent, he says. In addition, the annual
premium will have to be paid for the entire life of the loan if the
initial LTV is more than 90 percent.
If you're considering a streamline refinance, act now before the
April changes go into effect, says Parsons. Increased premiums mean
fewer borrowers will be able to lower their monthly payment by the
five percent requirement, he says.
Talk to your lender
Even though the streamline refinance program has more lenient
requirements, some lenders will apply additional restrictions known
as "overlays." For example, even though the FHA doesn't require
income or credit verification, certain lenders lender might, says
Auerbach. "Ask the lender upfront if they have overlays," he
says.
The FHA frequently changes their programs, so it's important to
talk to FHA-approved mortgage lenders to get the latest details and
learn about potential overlays, says Auerbach.
If you want to refinance to capture some of the best mortgage
rates in decades, an FHA streamline refinance is definitely worth a
look. It very well could be the simplest way to save thousands of
dollars over the life of your mortgage.