What if there was a mortgage program that did not judge you based on your credit score? Sounds too good to be true, right? Luckily, there is a program! The FHA Streamline Program’s guidelines do not require a specific score in order for you to qualify; instead, they require that you currently have an FHA loan with on-time housing payments.
The Point of the FHA Streamline Program
The FHA Streamline Program was created to help people that currently have an FHA loan lower their interest rate. It is assumed that if you have a perfect housing history, or have no more than two 30-day late payments for the last 12 months on your current FHA loan that you will continue that good payment history with a lower payment. Because the new payment must be at least 20% lower than your current payment, the FHA does not put much emphasis on your credit score.
The Necessary Documents
So what do you need to prove that you can qualify for the FHA Streamline Program? Luckily, it is nowhere near as much as you needed for the original FHA loan. This time around, you will simply need the following:
- Proof of timely housing payments
- Your current FHA case number (located on your mortgage note)
- Your current interest rate on your FHA loan (also on your mortgage note)
- Proof of your employment; although your income will not be verified
- Declarations page of your current homeowner’s insurance
- Bank statements to show that you have the money to pay the closing costs
Any documents above and beyond the above requirements will be on a lender-by-lender basis. Some lenders require a credit report and proof of income, despite what the FHA says, while others strictly follow the FHA guidelines.
A 620 Credit Score
You will find some lenders that require a minimum 620 credit score in order to qualify for the FHA Streamline program. This does not mean that every lender will require it; if your score is lower than 620, but your housing payments were not late more than two times and not more than 30 days each time, there are lenders that will allow you to use the streamline program. The idea behind it is to help you get back on track with your payments by making them more affordable. Since you are lowering your payment, your debt ratio will decrease and your disposable income will increase, making your housing payments less of a struggle.
What if your Payment Goes Up?
There are circumstances that your payment will go up even when using the FHA Streamline Program. Typically, this occurs when you refinance from an adjustable rate loan into a fixed rate loan. It can also occur when you decrease your term, from say a 30-year to a 20-year loan. In both examples, you are making your loan less risky, despite the payment increasing. Lenders look at adjustable rate loans as riskier than fixed rates because of the adjustment periods that the loan goes through. If your loan adjusts too high and it becomes unaffordable, you could default on your loan.
The same is true for a shorter term loan. Your payment will obviously increase when you refinance from a 30-year to a 20-year because there is less time to pay the loan off, but the risk level is lower. The bank gets their money back in a shorter amount of time, which is a lower risk for them.
In general, you should focus on having at least a 620 credit score, but if you are struggling because your interest rate is too high, do not shy away from applying for the FHA Streamline Program. There are a variety of lenders out there that do not look at credit scores; they strictly focus on your housing payment history. This will enable you to obtain a lower interest rate, making your FHA payments more affordable in the end.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.