The FHA Streamline Program was created to help current FHA homeowners to save at least 5 percent on their current housing payment. Because of this stipulation, cash out is not allowed on this program as cash out violates several of the requirements for the streamline loan.
The Basic Requirements for the FHA Streamline
The largest requirement that would deter a current FHA homeowner from obtaining cash out with the FHA Streamline program is the need for the loan amount to be no more than the current outstanding principal balance plus any upfront mortgage premium. To complicate matters, if you obtained your current FHA loan within the last 36 months, you will receive an upfront mortgage insurance premium refund. This refund will be subtracted from your new upfront mortgage insurance, further decreasing your loan amount.
Here’s how it works:
- The lender will determine when you originated your current FHA loan
- If it was less than 36 months ago, but more than 6 months ago, the upfront mortgage insurance premium will be determined
- The premium refund ranges between 10 and 70% depending on how long you have had your loan
- Your new upfront mortgage insurance will be calculated based on your loan amount; the current upfront MIP rates are 1.75%.
- The total of your current principal balance and the new upfront mortgage insurance premium minus the MIP refund will be your new loan amount
You are unable to include cash out for home improvements, debt consolidation, or even closing costs.
Why Cash out is not Allowed
Many homeowners wonder why cash out is not allowed on the FHA Streamline Program, but the answer is simple – there is no appraisal required. This means that some homeowners can even be upside down on their mortgage; this means they owe more than the home is worth. If the FHA allowed these borrowers to take cash out of their home, they would become upside down even further.
The basic idea behind the streamline program is to make the loan more affordable so that borrowers can get ahead of the value, rather than further behind it. By having the ability to refinance at today’s interest rates, borrowers can save money and pay the loan down faster. This is true even if you keep the same term because by lowering the interest, you pay more principal at a time, getting the loan paid off faster.
Use the Streamline Program to Save Money
The only reason a borrower would use the FHA Streamline Program is to save money. This could mean saving money on interest by simply reducing the interest rate; reducing the term of the loan; or refinancing out of an adjustable rate loan. Because the FHA and most lenders do not require a lot of verification for these loans, they have to provide some type of money saving benefit in order for you to qualify.
If you need cash out on an FHA loan, you will have to go through the full FHA verification process again. The requirements are similar to that of the standard FHA loan you already qualified for on your home, but you will have to be prepared to have your credit evaluated, the value of your home determined, and your debt ratio determined.
If you have made your housing payments on time for the last 12 months and are not trying to take any equity out of your home, you could qualify for the quick and easy to qualify for FHA Streamline program with very little verification required.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.