Welcome to our week-long series on refinancing your mortgage. In this third of five articles, we look at the FHA Streamline Refinance program.
Yesterday we looked at the Home Affordable Refinance Program. Called HARP, this program helps homeowners who have an underwater mortgage lower their interest rates. But it only applies if your mortgage is owned or guaranteed by Fannie Mae or Freddie Mac.
Today we will cover a program for those who have a mortgage insured by the Federal Housing Administration.
FHA Streamline Refinance Eligibility
Called the FHA Streamline Refinance, this program reduces the documentation necessary to refi. For those with an FHA loan, here are the eligibility requirements:
- The mortgage to be refinanced must already be FHA insured.
- The mortgage to be refinanced should be current (not delinquent).
- The refinance is to result in a lowering of the borrower’s monthly principal and interest payments.
- No cash may be taken out on mortgages refinanced using the streamline refinance process.
You can check out FHA mortgage rates online, and then speak to a mortgage broker about these eligibility requirements.
Perhaps the biggest benefit of an HFA Streamline Refinance is that it does not require an appraisal. Instead, the lender will use the purchase price you paid for the home as the home’s value. As a result, you can refi your mortgage even if the market value of your home has dropped since you bought it.
In addition, there is no loan-to-value limitation. So even if you owe nearly 100% of the purchase price on your current mortgage, you can still qualify under the FHA refinance program.
There are some details you should understanding. As noted above, you must be current on your existing mortgage. For borrowers who have less than 12 months history with their current mortgage, the borrower must have made all payments within the month that they were due. For those with more than 12 months of history with the current mortgage, they must have–
- Experienced no more than one 30 day late payment in the preceding 12 months, AND
- Made all mortgage payments within the month due for the three months prior to the date of loan application.
If you recently refinanced under this program, you must wait at least 210 days and have made at least 6 monthly mortgage payments before you can refi again.
And finally, the new mortgage must result in what the FHA calls a “net tangible benefit.” Basically, this means that your monthly payments including mortgage insurance (see below) must go down by five percent.
Beginning last year, the documentation required to get an FHA refi were significantly reduced. For example, you do not need to verify your employment, income, or credit score. At first, this may sound too good to be true. But there is a method to this madness.
The FHA is already on the hook for existing mortgages insured by the FHA. So even if your property value has plummeted, you are out of work, and your credit score is in the tank, the FHA is still at risk. By refinancing to a lower rate, your monthly payment goes down. As a result, the risk of default goes down as well.
The FHA also requires homeowners to pay two types of mortgage insurance. First, you must pay for mortgage insurance at the time of closing equal to one percent of the loan amount. So if you mortgage is for $200,000, you’ll owe $2,000 at closing. FHA allows this insurance premium to be rolled into the refinance loan, so you don’t have to pay this out of pocket.
The second type of mortgage insurance is monthly and the premium depends on the type of mortgage you get and the loan-to-value ratio. Here’s a breakdown:
- 30-year loan terms, equal to or less than 95% loan-to-value : 0.85% MIP
- 30-year loan terms, over 95% loan-to-value : 0.90% MIP
- 15-year loan terms, equal to or less than 90% loan-to-value : None
- 15-year loan terms, over 90% loan-to-value : .25% MIP
These premiums will be added to your monthly mortgage payment.
Tomorrow we will look at some Obstacles to Refinancing Your Mortgage (And How to Overcome Them).
Published or updated February 16, 2012.