Guide to the FHA Streamline Refinance

FHA Streamline Refinance Loans

FHA which stands for Federal Housing Administration, a self-sufficient government agency providing mortgage insurance, is the largest insurance provider in the world with over thirty-four million insured properties throughout the US and its territories. Created in 1934, the program reduces the risk for FHA approved lenders by paying out claims due to losses from defaulted mortgages. Typically, the insurance premiums are paid monthly by the home owners as part of their mortgage payments, and are usually required by lenders when down payments are very low, thus, the debt-to-equity ratio is high. Once five years has passed, or the debt is seventy-eight percent of the property value, whichever is longer, the insurance costs will drop.

Through the years, the FHA has had different programs for different financial crises in the economy. One of these features is the FHA Streamline Refinance Loans, established in the 1980s. It permits lenders to offer refinancing with less strict rules than traditional home loan refinancing. In effect, it streamlines the process, or rather reduces the amount of documentation required. To qualify for streamline refinance loans, there are four general points:

  • The existing mortgage must be FHA insured.
  • The mortgage to be refinanced must be in good standing with no arrears.
  • The refinanced mortgage should have the end result of reducing the home owner’s payments through a reduction in principal owing and interest rate.
  • Cash-outs are not permitted.

Although streamline loans in themselves do not mean “no-cost loans”, the lenders do have the option of various types of streamline refinance loans. The first is where there are no cash outlays. That is to say, that the borrower is not required to have any cash to close the deal. Typically, the lender will choose a higher interest rate, out of which the costs of closing will be recouped. This results in no out-of-pocket expenses for the home owner. Contrarily, if the borrower can manage the closing costs from their own cash, the interest rates are more attractive.

Further, another way a lender can structure FHA streamline refinance loans, is to add the closing costs to the total amount of the loan. This is only permitted in circumstances where there is adequate equity. Should the proposed loan amount be close to the value of the home, an appraisal will be required to ensure that the home is not mortgaged for more than its present market value. The beauty of streamline refinance loans for those with plenty of equity, there is no need for an appraisal.

Here are some quick points listing the Pros and Cons of Streamline Refinance Loans for Home Owners:

Advantages:

  • lower monthly payments through reduced principal owing and interest
  • where equity is sufficient, no appraisal required
  • no income verification in most instances
  • quicker processing time due to less paperwork
  • FHA loans are assumable which means when interest rates are higher than the existing mortgage, it will be easier for the home owner to sell, as the buyer will want to assume a mortgage locked in at a lower rate.
  • Finally, it is not a requirement to live in the home that is being refinanced. Investment properties are permitted under the FHA Streamline Refinance Loans program.

Disadvantages:

  • With conventional mortgages, insurance is only required for a minimum of two years. In the case of FHA streamline refinance loans, the minimum time frame is five years.
  • No cash-outs
  • Amount of loan may be limited depending on the geographical location.
  • Some say that the insurance premium required actually reduces the equity if you had the chance to put it into a down payment. Obviously, you need to look at your own individual case to make that determination.