If you have an FHA loan right now, you have two options when you wish to refinance. The FHA streamline and a regular FHA refinance. Both options offer the ability to refinance your loan, but they offer vastly different benefits.
What is an FHA Streamline?
The FHA streamline is only offered to borrowers who currently have an FHA loan. It is streamlined because you do not have to verify very much in order to qualify. In addition to verifying that you currently have an FHA loan, you must verify timely payments. This means no late mortgage payments during the last 12 months. This is the only factor the lender uses to qualify you for the loan so it is very important that you do not have any late payments.
Lastly, the streamline loan must provide you with a benefit. This can mean:
- Lower interest rate that saves you money on your monthly payments
- Refinancing out of an ARM into a fixed rate loan
- Refinancing into a shorter term (you still must meet the 5% payment threshold)
If you qualify based on the lower payment, it means your payment is at least 5% lower than the original payment. Any savings less than 5% does not qualify you for the loan. This pertains to loans keeping the same term as well as those taking a shorter term. In addition, borrowers refinancing from an ARM to a fixed rate cannot use this as their “qualifier” until the interest rate adjusts and is in full effect. No matter the benefit you claim for the FHA streamline, under no circumstances can you increase your loan amount.
What you do not have to verify with the streamline program is your credit, income, assets, or the value of your home. The FHA allows lenders to use the original credit score, qualifying income and the value of your home. This does mean you may be upside down on your home. If your home decreased in value and you owe more than it is worth, though, you can still refinance your loan without worry as long as you meet the above net tangible benefits requirements.
How a Regular FHA Refinance Differs
Now that you know what an FHA Streamline loan is, you might wonder what the difference is with a regular FHA refinance. Basically, the regular refinance works like any other loan refinance. You have to fully qualify for the loan. This means you must verify:
- Income
- Assets
- Credit
- Value of the home
The lender must act as if they are qualifying you for a loan all over again. If the value of your home changed, it will affect your ability to refinance. The same is true for your credit and income. If your credit score does not meet the FHA guidelines (which are very flexible) you may not qualify. The same applies to your income – if your income decreased or your debts increased and your debt ratio is out of line, you may not qualify for a regular FHA refinance.
Choosing the Right Loan
So how do you choose between the FHA streamline and the standard FHA refinance? The reason for your refinance determines your choice. Take a look at your situation and answer the following questions:
- Do you want to refinance to secure a lower rate and save money each month?
- Do you need money out of the equity of your home?
- Do you need to increase your loan amount for any reason?
If your answers signify that you want to refinance for reasons other than just to lower your interest rate or save money each month, you need a regular FHA refinance. On the other hand, if your sole purpose in refinancing is to save money each month, the streamline loan is the best choice.
Closing Costs and Mortgage Insurance
The bottom line no matter which loan you choose, however, is you will pay closing costs. You will also pay mortgage insurance. This includes the upfront mortgage insurance premium. There is a small difference with the FHA streamline, though. If you refinance your current FHA loan within 3 years of its origination, you may receive a small refund of the upfront MIP you paid with the original loan. The lender uses this refund towards your new upfront MIP. This helps to lower your liability for this insurance on the refinance.
Right now, the new upfront MIP you pay on a streamline loan equals 1.75% of the loan amount. However, based on how long it has been since you originated your first FHA loan, you may owe less. The refund for MIP starts on the 6th month after you start your loan and decreases from there. For example:
- 6 months – 70% refund
- 8 months – 66% refund
- 10 months – 62% refund
- 12 months – 58% refund
- 24 months – 34% refund
- 36 months – 10% refund
As you can tell from the chart, the amount of your refund decreases by 2% for every month that passes from the origination of your loan.
The closing costs you pay will vary by lender. It is worth it to shop around to see what other lenders have to offer. As long as a lender is FHA approved, they can provide you with the FHA streamline loan. If you find a significant difference in the closing costs they quote you, it is worth waiting for the best offer, as it will increase your monthly savings.
Unless you need a higher loan amount or have other special circumstances, the streamline FHA loan provides many benefits for you. With its minimal work, it usually has lower closing costs and it is very easy to qualify for compared to a regular FHA refinance. Make sure to explore all of your options before deciding the right path for you.
